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North Carolina
2003 Tax Law Changes
North Carolina Department of Revenue
Tax Administration
North Carolina Department of Revenue
Tax Administration Page 1 2003 Tax Law Changes
PREFACE
This document is designed for use by personnel in the North Carolina
Department of Revenue. It is available to those outside the Department as a
resource document. It gives a brief summary of the following tax law changes:
( 1) Changes made by prior General Assemblies that take effect for tax year
2003. Each change enacted by a prior General Assembly is also discussed
in the Department’s Tax Law Change document for the year the change
was enacted.
( 2) Changes made by the 2003 General Assembly, regardless of when they
take effect.
The changes are listed by type of tax. The order of the tax types is their order in
the General Statutes, except for local sales and use tax changes. The local
sales and use tax changes follow the State sales and use tax changes, and both
changes are grouped under the heading “ Sales and Use Tax.” Within a tax type,
the changes are listed in numerical order. The document does not include law
changes that affect the Department of Revenue but do not affect the tax laws.
For further information on a tax law change, refer to the legislation that made the
change. Administrative rules, bulletins, directives, and other instructions issued
by the Department, as well as opinions issued by the Attorney General’s Office,
may provide further information on the application of a tax law change.
North Carolina Department of Revenue
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Table of Contents
Type of Tax Page
I. Estate Tax............................................................................................ 3
II. Tobacco Products License and Excise Taxes ..................................... 3
III. Alcoholic Beverage License and Excise Taxes .................................... 4
IV. Corporate Franchise Tax...................................................................... 5
V. Tax Incentives for New and Expanding Businesses ............................ 5
VI. Historic Rehabilitation Tax Credits ....................................................... 7
VII. Low- Income Housing Tax Credits ........................................................ 9
VIII. Corporate Income Tax ......................................................................... 9
IX. Individual Income Tax .......................................................................... 13
X. Tax Credits for Qualified Business Investments................................... 16
XI. Withholding of Income Tax................................................................... 17
XII. Sales and Use Tax............................................................................... 17
XIII. Insurance Premiums Tax ..................................................................... 28
XIV. General Administration......................................................................... 30
XV. Property Tax......................................................................................... 32
XVI. Motor Fuels Tax ................................................................................... 34
XVII. Debt Set- Off ......................................................................................... 37
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ESTATE TAX
G. S. 105- 32( b) – Calculation of Estate Tax Under Prior Law: The 2002
General Assembly modified the formula for calculating North Carolina estate tax
for estates that include property located in North Carolina and in one or more
other states. This subsection was amended so that if using the new formula
creates an increase in tax for a decedent dying before August 22, 2002, the
estate tax may be calculated under prior law.
( Effective January 1, 2002; and applies to estates of decedents dying on or after
that date, SB 97, s. 1, S. L. 03- 416.)
G. S. 105- 32.2( b) Delay Sunset of Estate Tax: The federal Economic Growth
and Tax Relief Act of 2001 made changes to the federal estate tax laws by
increasing the amount excluded from federal estate tax and by phasing out the
state death tax credit over four years beginning in 2002. The federal changes
were effective for estates of decedents dying on or after January 1, 2002.
In 2002, the General Assembly conformed North Carolina’s exclusion amounts to
the federal exclusion amounts. However, G. S. 105- 32.2( b) was amended to
provide that the North Carolina estate tax is equal to the state death tax credit for
federal purposes before the phase- out of the federal credit. The amendment was
scheduled to sunset effective for estates of decedents dying on or after January
1, 2004.
The 2003 General Assembly amended this subsection by delaying the sunset to
July 1, 2005. This means that the North Carolina estate tax will continue to be
equal to the state death tax credit for federal purposes without regard to the
phase- out and termination of the federal credit.
( Effective for estates of decedents dying on or after July 1, 2005. HB 397, s.
37A. 5, S. L. 03- 284.)
TOBACCO PRODUCTS LICENSE AND EXCISE TAXES
G. S. 105- 113.21 – Repeal of Cigarette Tax Discount: Subsection ( a) of this
section was repealed to eliminate the 4% discount previously allowed to cigarette
distributors who both timely filed the monthly cigarette tax report and timely paid
the cigarette tax due. Subsection ( b) was rewritten to delete language regarding
the discount to conform with the repeal of subsection ( a).
( Effective for reporting periods beginning on or after August 1, 2003; HB 397, s.
45A. 1( a), S. L. 03- 284.)
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G. S. 105- 113.35( c) – Conforming Change: This subsection was amended to
delete language regarding the discount against the tax on other tobacco products
to conform with the changes to G. S. 105- 113.39 that eliminated the discount.
( Effective for reporting periods beginning on or after August 1, 2003; HB 397, s.
45A. 1( b), S. L. 03- 284.)
G. S. 105- 113.39 – Repeal of Discount Against Tax on Other Tobacco
Products: This section was repealed to eliminate the 4% discount previously
allowed to wholesale dealers or retail dealers who both timely filed the monthly
tax on other tobacco products report and timely paid the tax due.
( Effective for reporting periods beginning on or after August 1, 2003; HB 397, s.
45A. 1( c), S. L. 03- 284.)
ALCOHOLIC BEVERAGE LICENSE AND EXCISE TAXES
G. S. 105- 113.68( a) – Definition Added: This subsection was amended by
adding new subdivision ( 15) to define “ Wine shipper permittee.” This is one of a
series of changes that enable out- of- state wineries to legally ship wine directly to
consumers in North Carolina.
( Effective October 1, 2003; SB 668, s. 8, S. L. 03- 402.)
G. S. 105- 113.83( b) – Liability for Payment of Wine Excise Tax: This
subsection was amended to impose liability for the wine excise tax on wine
shipped directly to consumers in North Carolina on the wine shipper permittee.
This is one of a series of changes that enable out- of- state wineries to legally ship
wine directly to consumers in North Carolina.
( Effective October 1, 2003; SB 668, s. 10, S. L. 03- 402.)
G. S. 105- 113.84 – Reporting Requirements: This section was amended to
require wine shipper permittees to file a monthly report of the amount of wine
shipped directly to North Carolina consumers during the month. This is one of a
series of changes that enable out- of- state wineries to legally ship wine directly to
consumers in North Carolina.
( Effective October 1, 2003; SB 668, s. 11, S. L. 03- 402.)
G. S. 105- 113.85 – Repeal of Alcoholic Beverage Tax Discount: This section
was repealed to eliminate the 4% discount previously allowed to wholesalers or
importers who both timely filed the monthly alcoholic beverage tax report and
timely paid the tax due.
( Effective for reporting periods beginning on or after August 1, 2003; HB 397, s.
45A. 2( a), S. L. 03- 284.)
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CORPORATE FRANCHISE TAX
G. S. 105- 122( c)( 1) – Technical Changes: This subdivision was rewritten to
modernize some of the language and to replace the term “ business” with the
term “ apportionable” every time the subdivision referred to “ business income.”
This conforms to the language used in recent court decisions and by the
Department of Revenue on the 2002 corporate income and franchise tax returns
after the definition of “ business income” was amended by the 2002 General
Assembly.
( Effective August 14, 2003; SB 97, s. 5( j), S. L. 03- 416.)
TAX INCENTIVES FOR NEW AND EXPANDING BUSINESSES
Article 3A
G. S. 105- 129.2( 17a) – Definition of Overdue Tax Debt: This section was
amended to add a new subdivision ( 17a) to define overdue tax debt. The
definition is the same as in G. S. 105- 243.1. It is a debt that remains unpaid 90
days after a notice of final assessment is mailed to the taxpayer. The definition
was added along with new G. S. 105- 129.4( b6) to accomplish the goal of not
giving tax credits to taxpayers that are not in compliance with the tax laws.
( Effective for taxable years beginning on or after January 1, 2003; HB 1734, s.
1.5, S. L. 02- 172.)
G. S. 105- 129.3A – Definition of Development Zone Expanded: This section
was amended by adding a new subsection ( d) to define when a parcel of
property that is partially in a development zone is considered to be entirely within
the development zone and, therefore, eligible for the Article 3A enhancements for
development zones. All of the following conditions must be satisfied for the
parcel of property to be considered entirely within the development zone:
( 1) At least fifty percent of the parcel is located within the development zone.
( 2) The parcel was in existence and under common ownership prior to the most
recent federal decennial census.
( 3) The parcel is a portion of land made up of one or more tracts or tax parcels
of land that is surrounded by a continuous perimeter boundary.
( Effective for taxable years beginning on or after January 1, 2003; HB 1734, s.
1.4, S. L. 02- 172.)
G. S. 105- 129.4( a)( 7) – Clarifying Change With Respect to Eligibility for the
Research and Development Credit: This subdivision was added to provide
special rules with respect to determining eligibility for the research and
development credit. If the primary activity of an establishment of the taxpayer in
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this State is computer services, the taxpayer's qualified research expenditures in
this State are considered to be used in computer services. For all other
taxpayers, the taxpayer's qualified research expenditures in this State are
considered to be used in the primary business of the taxpayer.
( This amendment clarifies the intent of the existing law and does not represent a
change in the law. Therefore, the special rule with respect to computer services
is effective for taxable years beginning on or after January 1, 2001, and the
special rule with respect to all other taxpayers is effective for taxable years
beginning on or after January 1, 1996; SB 236, s. 8.1, S. L. 03- 349.)
G. S. 105- 129.4( b) – Wage Standard Changes: Two amendments were made
to this subsection. One of these changes eliminates the wage standard test for
tier one and two areas and for the credit for worker training. Elimination of the
wage standard test for tier one areas also eliminates the test for development
zones, which have the status of a tier one area under G. S. 105- 129.3A for
purposes of the wage standard. As part of this change, the reference to the
credit for substantial investment in other property is deleted. This is because that
credit, in G. S. 105- 129.12A, applies only in an enterprise tier one or two area.
Under prior law, the wage standard for a tier one area or a development zone
was the average weekly wage of the county in which the jobs were located, and
the wage standard for a tier two area was 110% of the average weekly wage of
the county. Elimination of the wage standard test for the lower tier areas
provides an incentive for all jobs created and not just the higher paying jobs.
The wage standard for the worker training credit was eliminated because it was
considered redundant and counter to the goal of the credit. A taxpayer cannot
qualify for the worker training credit unless the taxpayer also qualifies for the jobs
credit or the machinery and equipment credit, both of which have wage standard
requirements. Workers in lower- paying jobs may need more training than those
in higher- paying jobs.
The other change addresses a practical problem of determining the wage
standard that applies to a taxpayer whose taxable year is not a calendar year.
Under the statute, wage standards are determined on a calendar year basis.
The amendment provides that a taxpayer must use the wage standard for the
calendar year in which its taxable year begins.
( Effective for taxable years beginning on or after January 1, 2003; HB 1734, s.
1.3( b), S. L. 02- 172.)
G. S. 105- 129.4( b6) – Overdue Tax Debts: This subsection was added to make
a taxpayer ineligible for an Article 3A tax credit if the taxpayer has an overdue tax
debt at the time the taxpayer claims an installment or carryforward of a credit. An
overdue tax debt is defined in G. S. 105- 243.1( a)( 1) as “[ a] ny part of a tax debt
that remains unpaid 90 days or more after the notice of final assessment was
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mailed to the taxpayer. The term does not include a tax debt, however, if the
taxpayer entered into an installment agreement for the tax debt under G. S. 105-
237 within 90 days after the notice of final assessment was mailed and has not
failed to make any payments due under the installment agreement.”
( Effective for taxable years beginning on or after January 1, 2003; HB 1734, s.
1.2, S. L. 02- 172.)
G. S. 105- 129.9 – Changes to Credit for Investing in Machinery and
Equipment: Two substantive changes were made to this section. Those
changes decrease the credit percentage in some tiers and increase the
investment thresholds for some tiers. Reports on the tax credits show that most
of the tax credit dollars for the credit for machinery and equipment go to
companies in tiers 4 and 5. The changes reduce the machinery and equipment
credits for the higher tiers.
Subsection ( a) was amended to decrease the credit percentage in tiers 3, 4, and
5. Under prior law, a taxpayer was allowed a credit equal to 7% of the excess of
the eligible investment amount over the applicable threshold, regardless of the
tier in which the investment was placed in service. As amended, the credit
percentage remains 7% for tiers 1 and 2 but is decreased to 6% for tier 3, 5% for
tier 4, and 4% for tier 5.
Subsection ( c) was amended to increase the investment thresholds for tiers 4
and 5. For tier 4, the threshold is increased from $ 500,000 to $ 1,000,000. For
tier 5, the threshold is increased from $ 1,000,000 to $ 2,000,000.
( Effective for taxable years beginning on or after January 1, 2003, and apply to
business activities that occur on or after that date except for business activities
subject to a letter of commitment signed before that date; HB 1734, s. 1.1, S. L.
02- 172.)
HISTORIC REHABILITATION TAX CREDITS
Article 3D
G. S. 105- 129.35( a) – Certification Required to Claim Credit for
Rehabilitating an Income- Producing Historic Structure: This subsection was
amended to require a taxpayer, when claiming a credit for rehabilitating an
income- producing historic structure, to provide a copy of the certification obtained
from the State Historic Preservation Officer verifying that the historic structure
has been properly rehabilitated.
( Effective July 15, 2003; HB 397, s. 35A. 1, S. L. 03- 284)
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G. S. 105- 129.35( b) – Sunset of Special Allocation Provisions Extended;
Substantive Changes to Allocation Rules: Two amendments were made to
this subsection. The first amendment extended the sunset for the special
allocation rules applicable to pass- through entities that are eligible for the credit
for rehabilitating an income- producing historic structure from January 1, 2004 to
January 1, 2008. The second amendment made substantive changes to those
special allocation rules. Under prior law, the special allocation provisions
prohibited the allocation of a credit to an owner in excess of the owner’s adjusted
basis in the pass- through entity. As amended, the owner’s basis must be at least
40% of the amount of credit allocated to that owner.
( Extension of sunset effective August 14, 2003; substantive changes effective for
taxable years beginning on or after January 1, 2003; SB 119, ss. 1 and 2, S. L.
03- 415.)
G. S. 105- 129.35( c) – Definitions: There were two amendments to this
subsection. The first amendment added a new subdivision ( 4) to define “ State
Historic Preservation Officer” by cross- reference to G. S. 105- 129.6. The second
change to subsection ( c) amended the definition of “ Pass- through entity” as part
of a series of changes that moved the definition to Article 9 of Chapter 105 and
cross- referenced that definition where appropriate.
( First amendment to subsection ( c) effective July 15, 2003; HB 397, s. 35A. 1,
S. L. 03- 284; second amendment to subsection ( c) effective August 14, 2003; SB
97, s. 4( c), S. L. 03- 416.)
G. S. 105- 129.36( a) – Conforming Change to Credit for Rehabilitating a
Nonincome- Producing Historic Structure: This subsection was amended to
conform to the changes to G. S. 105- 129.35( a) with respect to providing a copy of
the certification when claiming the credit for rehabilitating a nonincome- producing
historic structure.
( Effective July 15, 2003; HB 397, s. 35A. 3, S. L. 03- 284.)
G. S. 105- 129.36( c) – Rule- Making Authority Recodified: This subsection was
recodified as G. S. 105- 129.36A. By moving this provision to G. S. 105- 129.36A,
it also applies to the credit for rehabilitating an income- producing historic
structure. The provision previously applied only to the credit for rehabilitating a
nonincome- producing historic structure.
( Effective July 15, 2003; HB 397, s. 35A. 2, S. L. 03- 284.)
G. S. 105- 129.36A – Rules and Fees With Respect to the Historic
Rehabilitation Tax Credits: This section was enacted to address the rule-making
authority and fees associated with the historic rehabilitation tax credits.
Subsection ( a) provides that the North Carolina Historical Commission, in
consultation with the State Historic Preservation Officer, may adopt rules needed
to administer the certification process. This subsection was previously codified
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as G. S. 105- 129.36( c). Subsection ( b) is a new provision that allows the North
Carolina Historical Commission, in consultation with the State Historic
Preservation Officer, to impose fees for providing certifications of the
rehabilitations. In establishing the amount of the fee, the administrative and
personnel costs incurred by the Department of Cultural Resources shall be
considered. The fee may not exceed 1% of the completed qualifying
rehabilitation expenditures. The proceeds of the fees are receipts of the
Department of Cultural Resources and must be used for performing its duties
under this Article.
( Effective July 15, 2003; HB 397, s. 35A. 2, S. L. 03- 284.)
LOW- INCOME HOUSING TAX CREDITS
Article 3E
G. S. 105- 129.40 – Clarifying and Technical Changes: The title of this section
was renamed as “ Scope and definitions” and subsection ( a) was added to clarify
the effective date of the low- income housing tax credit as amended by the 2002
General Assembly. The existing language of this section was recodified as
subsection ( b) and the definition of “ Pass- through entity” ( G. S. 105- 129.40( b)( 2))
was amended as part of a series of changes that moved the definition to Article 9
of Chapter 105 and cross- referenced that definition where appropriate.
( Effective August 14, 2003; SB 97, s. 3, S. L. 03- 416).
G. S. 105- 129.42( a)( 3) – Technical Change: This subdivision was amended to
correct capitalization errors.
( Effective August 14, 2003; SB 97, s. 6, S. L. 03- 416).
G. S. 105- 129.42( g) – Technical Change: This subsection was amended to
correct a grammatical error.
( Effective August 14, 2003; SB 97, s. 7, S. L. 03- 416).
G. S. 105- 129.42( i) – Clarifying Change: This subsection was amended to
clarify that, when calculating the liability resulting from forfeiture of the low-income
housing credit, the interest, not the interest rate, is determined from the
date the Secretary transferred the credit amount to the Housing Finance Agency.
( Effective August 14, 2003; SB 97, s. 8, S. L. 03- 416).
CORPORATE INCOME TAX
G. S. 105- 130.4( a)( 1) - Technical Change: This subdivision was rewritten to
replace the term “ business” with the term “ apportionable” when referring to
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“ business income.” This conforms to the language used in recent court decisions
and by the Department of Revenue on the 2002 corporate income and franchise
tax returns after the definition of “ business income” was amended by the 2002
General Assembly.
( Effective August 14, 2003; SB 97, s. 5( a), S. L. 03- 416.)
G. S. 105- 130.4( a)( 5) - Technical Changes: This subdivision was rewritten to
replace the term “ business” with the term “ apportionable” when referring to
“ business income” and the term “ nonbusiness” with the term “ nonapportionable”
when referring to “ nonbusiness income.” This conforms to the language used in
recent court decisions and by the Department of Revenue on the 2002 corporate
income and franchise tax returns after the definition of “ business income” was
amended by the 2002 General Assembly.
( Effective August 14, 2003; SB 97, s. 5( b), S. L. 03- 416.)
G. S. 105- 130.4( c) - Technical and Conforming Changes: This subsection was
amended to make a technical change by replacing the term “ nonbusiness” with
the term “ nonapportionable” when referring to “ nonbusiness income.” This
conforms to the language used in recent court decisions and by the Department
of Revenue on the 2002 corporate income and franchise tax returns after the
definition of “ business income” was amended by the 2002 General Assembly.
This subsection was also amended to conform to the repeal of G. S. 105- 130.7 as
part of the changes made to the corporate tax laws so that dividends received by
a corporation from regulated investment companies ( RICs) or real estate
investment trusts ( REITs) are taxable for State income tax purposes to the same
extent as for federal income tax purposes.
( Technical change effective August 14, 2003; SB 97, s. 5( c), S. L. 03- 416;
conforming change effective for taxable years beginning on or after January 1,
2003; SB 236. s. 1.2, S. L. 03- 349.)
G. S. 105- 130.4( f) – Conforming Change: This subsection was amended to
conform to the repeal of G. S. 105- 130.7 as part of the changes made to the
corporate tax laws so that dividends received by a corporation from regulated
investment companies ( RICs) or real estate investment trusts ( REITs) are
taxable for State income tax purposes to the same extent as for federal income
tax purposes.
( Effective for taxable years beginning on or after January 1, 2003; SB 236. s. 1.3,
S. L. 03- 349.)
G. S. 105- 130.4( i) - Technical Change: This subsection was rewritten to replace
the term “ business” with the term “ apportionable” when referring to “ business
income.” This conforms to the language used in recent court decisions and by
the Department of Revenue on the 2002 corporate income and franchise tax
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returns after the definition of “ business income” was amended by the 2002
General Assembly.
( Effective August 14, 2003; SB 97, s. 5( d), S. L. 03- 416.)
G. S. 105- 130.4( j)( 2) - Technical Changes: This subdivision was rewritten to
replace the term “ business” with the term “ apportionable” when referring to
“ business income” and the term “ nonbusiness” with the term “ nonapportionable”
when referring to “ nonbusiness income.” This conforms to the language used in
recent court decisions and by the Department of Revenue on the 2002 corporate
income and franchise tax returns after the definition of “ business income” was
amended by the 2002 General Assembly.
( Effective August 14, 2003; SB 97, s. 5( e), S. L. 03- 416.)
G. S. 105- 130.4( k)( 1) – Technical Change: This subdivision was rewritten to
replace the term �� nonbusiness” with the term “ nonapportionable” when referring
to “ nonbusiness income.” This conforms to the language used in recent court
decisions and by the Department of Revenue on the 2002 corporate income and
franchise tax returns after the definition of “ business income” was amended by
the 2002 General Assembly.
( Effective August 14, 2003; SB 97, s. 5( f), S. L. 03- 416.)
G. S 105- 130.4( l)( 1) – Technical Changes: This subdivision was rewritten to
replace the term “ business” with the term “ apportionable” when referring to
“ business income” and the term “ nonbusiness” with the term “ nonapportionable”
when referring to “ nonbusiness income.” This conforms to the language used in
recent court decisions and by the Department of Revenue on the 2002 corporate
income and franchise tax returns after the definition of “ business income” was
amended by the 2002 General Assembly.
( Effective August 14, 2003; SB 97, s. 5( g), S. L. 03- 416.)
G. S. 105- 130.4( m) through ( s) – Technical Changes: These subsections were
rewritten to modernize some of the language and to replace the term “ business”
with the term “ apportionable” every time the subsections referred to “ business
income.” This conforms to the language used in recent court decisions and by
the Department of Revenue on the 2002 corporate income and franchise tax
returns after the definition of “ business income” was amended by the 2002
General Assembly.
( Effective August 14, 2003; SB 97, s. 5( h), S. L. 03- 416.)
G. S. 105- 130.5( a)( 15) – Additional First- Year Depreciation Add- Back
Extended: This subdivision was amended to extend the requirement to add to
federal taxable income a percentage of the additional first- year depreciation
allowance to the taxable year 2004. The 2002 General Assembly had enacted
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this add- back provision to delay the impact on North Carolina’s budget of the
federal 30% bonus depreciation allowance enacted in 2002. The add- back
percentage was originally set at 100% for taxable year 2002, 70% for taxable
year 2003, and 0% for taxable year 2004 and subsequent years. Federal law
was changed in 2003 to increase the bonus depreciation rate from 30% to 50%.
To delay the impact of this change on the North Carolina budget, the add- back
percentage for the taxable year 2004 was increased from 0% to 70%. The add-back
percentages for all other years remain the same.
( Effective June 30, 2003; HB 397, s. 37A. 3, S. L. 03- 284.)
G. S. 105- 130.5( b)( 3) - RIC and REIT Dividend Deduction Repealed: This
subsection was repealed as part of the changes made to the corporate tax laws
so that dividends received by a corporation from regulated investment companies
( RICs) or real estate investment trusts ( REITs) are taxable for State income tax
purposes to the same extent as for federal income tax purposes. Under prior
law, this subsection provided a deduction from federal taxable income for the
deductible portion of dividends as provided under G. S. 105- 130.7. Under that
statute, a corporation could deduct the proportionate share of dividends received
from RICs and REITs that would not have been subject to North Carolina tax if
received directly by the corporation.
The change has no practical effect on the amount of dividends received from
RICs that are taxed because dividends from RICs are subject to the same
dividend received deduction as dividends from corporations for federal income
tax purposes. However, the amount deducted is now subject to the attribution of
expenses provisions in G. S. 105- 130.5( c)( 3). For dividends received from
REITs, this is a more substantive change in that dividends received from REITs
are not subject to the federal dividends received deduction provisions.
( Effective for taxable years beginning on or after January 1, 2003; SB 236. s. 1.1,
S. L. 03- 349.)
G. S. 105- 130.7 – RIC and REIT Dividend Deduction Repealed: This statute
was repealed as part of the changes made to the corporate tax laws so that
dividends received by a corporation from regulated investment companies ( RICs)
or real estate investment trusts ( REITs) are taxable for State income tax
purposes to the same extent as for federal income tax purposes. Under prior
law, a corporation could deduct the proportionate share of dividends received
from RICs and REITs that would not have been subject to North Carolina tax if
received directly by the corporation.
The change has no practical effect on the amount of dividends received from
RICs that are taxed because dividends from RICs are subject to the same
dividend received deduction as dividends from corporations for federal income
tax purposes. However, the amount deducted is now subject to the attribution of
expenses provisions in G. S. 105- 130.5( c)( 3). For dividends received from
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REITs, this is a more substantive change in that dividends received from REITs
are not subject to the federal dividends received deduction provisions.
Subsection ( b) of this statute, which provided for the State subsidiary dividend
deduction, was repealed by the 2001 General Assembly to conform North
Carolina’s taxation of dividends received by a corporation from other corporations
to federal law.
( Effective for taxable years beginning on or after January 1, 2003; SB 236. s. 1.1,
S. L. 03- 349.)
G. S. 105- 130.7A( b)( 4) b – Technical Change: This subparagraph was
amended to correct a technical error in the description of one of the
classifications of entities that are considered related entities. The description
listed several entities, including non- corporate entities, and classified them as
related entities if they were component members of the taxpayer. The term
“ component member”, as defined in Internal Revenue Code section 1563( b),
does not include non- corporate members. The component member test is
replaced with a stock ownership test. The entities identified in the subparagraph
are considered related members if they, in the aggregate, own at least 50% of
the value of the taxpayer’s outstanding stock.
( Effective August 14, 2003; SB 97, s. 15, S. L. 03- 416.)
G. S. 105- 130.8( a)( 5) – Technical change: This subdivision was rewritten to
replace the term “ nonbusiness” with the term “ nonapportionable” when referring
to “ nonbusiness income.” This conforms to the language used in recent court
decisions and by the Department of Revenue on the 2002 corporate income and
franchise tax returns after the definition of “ business income” was amended by
the 2002 General Assembly.
( Effective August 14, 2003; SB 97, s. 5( i), S. L. 03- 416.)
G. S. 105- 130.41 – Ports Tax Credit Extended: This section was amended to
extend the sunset for the ports tax credit to taxable years beginning on or after
January 1, 2009. Previously, the credit was scheduled to expire for taxable years
beginning on or after January 1, 2004.
( Effective August 14, 2003; HB 1294, s. 7, S. L. 03- 414.)
INDIVIDUAL INCOME TAX
G. S. 105- 134.2( a): Delay Sunset of Temporary Tax Rate Increase: The
temporary individual income tax rate of 8.25% was scheduled to expire for tax
years beginning on or after January 1, 2004. This subsection was amended to
delay the sunset until January 1, 2006.
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The 8.25% individual income tax rate bracket applies as follows: Married
individuals filing joint returns – 8.25% on taxable income over $ 200,000; Heads
of households – 8.25% on taxable income over $ 160,000; Unmarried individuals
other than surviving spouses and heads of households – 8.25% on taxable
income over $ 120,000; and Married individuals filing separately – 8.25% on
taxable income over $ 100,000.
( Effective for taxable years beginning on or after January 1, 2001, and expires for
taxable years beginning on or after January 1, 2006; HB 397; s. 39.1 and 2, S. L.
03- 284.)
G. S. 105- 134.6( c)( 3) and ( 4) – Elimination of Standard Deduction Marriage
Penalty Takes Effect: The 2001 General Assembly amended these
subdivisions in two phases to eliminate the marriage penalty with respect to the
standard deduction. The 2002 General Assembly postponed the 2001 changes.
The 2001 Legislation eliminated the standard deduction marriage penalty by
increasing the standard deduction for married filers from its current level of
$ 5,000 for married filing jointly to twice the amount allowed single filers and from
its current level of $ 2,500 for married filing separately to the amount allowed
single filers. The standard deduction for single filers is $ 3,000. The increase
was to be phased in over the 2002 and 2003 tax years; however, the 2002
General Assembly postponed the phase- in to tax years 2003 and 2004 as
follows:
Status 2003 2004
Married filing jointly $ 5,500 $ 6,000
Married filing separately $ 2,750 $ 3,000
( Increase originally effective for taxable years beginning on or after January 1,
2002; SB 1005, s. 34.19( a) and ( b), S. L. 01- 424; delay effective September 30,
2002, SB 1115, ss. 30B. 1, 30B. 2, and 30I, S. L. 02- 126.)
G. S. 105- 134.6( c)( 8) – Additional First- Year Depreciation Add- Back
Extended: This subdivision was amended to extend the requirement to add to
federal taxable income a percentage of the additional first- year depreciation
allowance to the taxable year 2004. The 2002 General Assembly had enacted
this add- back provision to delay the impact on North Carolina’s budget of the
federal 30% bonus depreciation allowance enacted in 2002. The add- back
percentage was originally set at 100% for taxable year 2002, 70% for taxable
year 2003, and 0% for taxable year 2004 and subsequent years. Federal law
was changed in 2003 to increase the bonus depreciation rate from 30% to 50%.
To delay the impact of this change on the North Carolina budget, the add- back
percentage for the taxable year 2004 was increased from 0% to 70%. The add-back
percentages for all other years remain the same.
( Effective June 30, 2003; HB 397, s. 37A. 2, S. L. 03- 284.)
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G. S. 105- 151.22 – Ports Tax Credit Extended: This credit was amended to
extend the sunset for the ports tax credit to taxable years beginning on or after
January 1, 2009. Previously, the credit was scheduled to expire for taxable years
beginning on or after January 1, 2004.
( Effective August 14, 2003; HB 1294, s. 8, S. L. 03- 414.)
G. S. 105- 151.24 – Two- Step Increase in Credit for Children Takes Effect;
Conforming Change: The 2001 General Assembly amended this section to
make a two- step increase in the tax credit for a dependent child for whom the
taxpayer is allowed to claim a personal exemption. Under the 2001 legislation,
the first step was scheduled to become effective for taxable years beginning on
or after January 1, 2002, and to increase the credit from $ 60 to $ 75. The second
step was scheduled to become effective for taxable years beginning on or after
January 1, 2003, and to increase the credit from $ 75 to $ 100.
The 2002 General Assembly amended the effective dates of the 2001 legislation
to delay the scheduled increases in the credit amounts for tax years 2002 and
2003 to tax years beginning on or after January 1, 2003 and January 1, 2004,
respectively. Therefore, the tax credit is $ 75 for tax year 2003 and $ 100 for
2004.
The 2003 General Assembly amended this section to conform to the age limits
for the credit for children to the federal age limits. The change allows the tax
credit on the North Carolina return only to an individual who was allowed the
credit on the federal return. The federal child tax credit is limited to dependent
children who are under age 17 on the last day of the taxable year. Previously,
the North Carolina child tax credit was allowed for dependent children who were
under 19 on the last day of the tax year or for a student under the age of 24 on
the last day the year.
( Two- step increase originally effective for taxable years beginning on or after
January 1, 2002; SB 1005, s. 34.20 ( a) and ( b), S. L. 01- 424; delay effective
September 30, 2002, SB 1115, ss. 30B. 2.( a), 30B. 2.( b), and 30I, S. L. 02- 126;
conforming change effective for taxable years beginning on or after January 1,
2003; HB 397, s. 39B. 2, S. L. 03- 284.)
G. S. 105- 159.2 – Designation of Tax to North Carolina Public Campaign
Fund: This statute was enacted to permit an individual to agree to allocate $ 3.00
of the individual’s tax liability to the North Carolina Public Campaign Financing
Fund if the individual has an income tax liability of at least that amount. The
North Carolina Public Campaign Financing Fund was established under G. S.
163- 278.63 to provide campaign money to nonpartisan candidates for the North
Carolina Supreme Court and Court of Appeals who voluntarily accept strict
campaign spending and fund- raising limits. On a joint return, each individual may
agree to allocate $ 3.00 to the Fund. Agreeing to allocate $ 3.00 to the Fund
neither increases the tax nor reduces a refund.
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The statute requires the Department to make it clear to taxpayers that the
allocation supports a nonpartisan court system and does not affect their tax
liability or the amount of their refund. The Department must include a specified
statement in the individual income tax instructions and must consult with the
State Board of Elections concerning information given to taxpayers about the
allocation.
The statute makes it clear that a decision to make an allocation to the Fund can
be made only by the taxpayer. It prohibits a paid preparer from marking the
return to make an allocation to the Fund without the consent of the taxpayer. It
also prohibits software packages used to produce North Carolina returns from
defaulting to an agreement or an objection.
( Effective for taxable years beginning on or after January 1, 2003; SB 1054, s. 4,
S. L. 02- 158.)
TAX CREDITS FOR QUALIFIED BUSINESS INVESTMENTS
G. S. 105- 163.010 – New Definitions Provided: This section was amended to
add the following new definitions for ( a) granting entity, ( b) qualified business,
and ( c) qualified licensee business.
( 5a) Granting Entity - A granting entity is any of the following: ( 1) a tax
exempt corporation whose principal purpose is stimulation of the
development of the biotechnology industry and who has received State
appropriations, ( 2) a tax exempt entity that is a private foundation whose
principal purpose is conducting research and development in certain high
technology fields or investing in companies that provide research and
development in certain high technology fields, or ( 3) an institute that is
administratively located within the UNC University system, is financed by a
tax exempt corporation, whose principal purpose is the stimulation of
economic development, and who funds other small businesses engaged
in developing technology.
( 7b) Qualified Business - A qualified business venture, a qualified grantee
business, or a qualified licensee business.
( 9a) Qualified Licensee Business - A qualified licensee business is a
business that is registered with the Securities Division of the Department
of the Secretary of State, has no more than $ 1,000,000 in gross revenues
annually, and is performing under a licensing agreement with a UNC
system institution or a doctoral research university for the purpose of
commercializing technology developed at the institution or university.
( Effective January 1, 2004; HB 1294, s. 2, S. L. 03- 414.)
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G. S. 105- 163.010( 7) – Definition of Pass- through Entity Revised: This
subsection was amended to cross– reference G. S. 105- 228.90. which now
provides the definition of a pass- through entity.
( Effective August 14, 2003; SB 97, s. 4.( a), S. L. 03- 416.)
G. S. 105- 163.010( 9) – Definition of Qualified Grantee Business Revised:
The definition of a qualified grantee business was expanded to include
businesses that receive grants or investments from “ granting entities”, which is
defined in subsection ( 5a).
( Effective January 1, 2004; HB 1294, s. 2, S. L. 03- 414.)
G. S. 105- 163.013( b1) – Investments Allowed in Qualified Licensee
Businesses: This subsection was added to provide a third category of qualified
businesses. Under previous law, only investments in qualified business ventures
and qualified grantee businesses qualified for the tax credit. Investments in
qualified licensee businesses, defined in subsection ( 9a), now qualify for the tax
credit.
( Effective for investments made on or after January 1, 2004; HB 1294, s. 5, S. L.
03- 414.)
G. S. 163.015 - Sunset Extended: The credit for qualified business investments
was scheduled to sunset for investments made on or after January 1, 2004. The
credit now sunsets for investments made on or after January 1, 2007.
( Effective for taxable years beginning on or after January 1, 2004; HB 1294, s, 1,
S. L. 03- 414.)
WITHHOLDING TAX
G. S. 105- 163.1( 9) – Definition of Pass- through Entity Revised: This
subsection was amended to cross– reference G. S. 105- 228.90. which now provides the
definition of a pass- through entity.
( Effective August 14, 2003; SB 97, s. 4( b), S. L. 03- 416.)
SALES AND USE TAX
G. S. 105- 164.3 – Definition Changes: Some definitions were revised, some
were recodified, and some are new. The changes are as follows and become
effective as noted after each definition:
Computer – ( 4a). This definition was added by the 2003 legislation bringing
North Carolina law closer to the standards that must be met to comply with the
national Streamlined Sales Tax Agreement. The term is defined as “ an
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electronic device that accepts information in digital or similar form and
manipulates it for a result based on a sequence of instructions.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Computer software – ( 4b). This definition was added by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. The term is defined as “ a
set of coded instructions designed to cause a computer or automatic data
processing equipment to perform a task.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Custom computer software – ( 5c). This definition was rewritten and recodified
by the 2003 legislation bringing North Carolina law closer to the standards that
must be met to comply with the national Streamlined Sales Tax Agreement. The
term was previously defined within the statutory exemption for custom computer
software. The term is defined as “ computer software that is not prewritten
computer software.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Delivered electronically – ( 5d). This definition was added by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. The term is defined as
“ delivered to the purchaser by means other than tangible storage media.” North
Carolina does not tax property delivered electronically.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Direct mail – ( 7a). This definition was added by the 2003 legislation bringing
North Carolina law closer to the standards that must be met to comply with the
national Streamlined Sales Tax Agreement. Direct mail is defined, in part, as
“ printed material delivered or distributed by the United States Postal Service or
other delivery service to a mass audience….” Special provisions regarding the
sourcing of direct mail and use of a direct pay permit by purchasers of direct mail
were also added.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Drug – ( 8a). This definition was added by the 2003 legislation bringing North
Carolina law closer to the standards that must be met to comply with the national
Streamlined Sales Tax Agreement. North Carolina law previously defined
“ prescription drug”; this legislation defines “ prescription” and “ drug” separately.
The change does not represent a substantive change in the law.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
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Durable medical equipment – ( 8b). This definition was added by the 2003
legislation bringing North Carolina law closer to the standards that must be met
to comply with the national Streamlined Sales Tax Agreement. Durable medical
equipment was included in the exemption for medical products ( G. S. 105-
164.13( 12) under prior law; however, the term was not defined. The term
includes items that serve a medical purpose, can withstand repeated use, and
are not worn on the body.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Durable medical supplies – ( 8c). This definition was added by the 2003
legislation bringing North Carolina law closer to the standards that must be met
to comply with the national Streamlined Sales Tax Agreement. Durable medical
supplies were included in the exemption for medical products under prior law;
however, the term was not defined. Durable medical supplies are “ supplies
related to use with durable medical equipment that are eligible to be covered
under the Medicare or Medicaid program.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Electronic – ( 8d). This definition was added by the 2003 legislation bringing
North Carolina law closer to the standards that must be met to comply with the
national Streamlined Sales Tax Agreement. The term is defined as “ relating to
technology having electrical, digital, magnetic, wireless, optical, electromagnetic,
or similar capabilities.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Engaged in business – ( 9). This definition was amended to provide that the term
includes the direct shipment of wine to a purchaser in the State by a wine shipper
permittee under G. S. 18B- 1001.1.
( Effective October 1, 2003; SB 668, s. 12, S. L. 03- 402.)
Lease or rental – ( 17). This definition was rewritten by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. There was no substantive
change in the law. Sourcing principles were added for periodic rental payments.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Load and leave – ( 17a). This definition was added by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. The term is defined as
" delivery to the purchaser by use of a tangible storage media where the tangible
storage media is not physically transferred to the purchaser.” North Carolina
does not tax property delivered by load and leave.
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( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Manufactured home – ( 20). This definition was rewritten to delete the reference
to specifications for modular homes. There is now a separate definition for
“ modular home.”
( Effective January 1, 2004 for sales made on and after that date; HB 1006, s. 13,
S. L. 03- 400.)
Mobility enhancing equipment – ( 21a). This definition was added by the 2003
legislation bringing North Carolina law closer to the standards that must be met
to comply with the national Streamlined Sales Tax Agreement. The term
includes equipment that is primarily and customarily used to provide or increase
the ability of an individual to move from one place to another.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Modular home – ( 21a). This definition was added as a result of the levy of a
2 ½ % State sales and use tax under G. S. 105- 164.4( a)( 8) on modular homes. A
modular home is a factory- built structure that is designed to be used as a
dwelling, is manufactured in accordance with the specifications for modular
homes under the North Carolina Residential Building Code, and bears a seal or
label issued by the Department of Insurance pursuant to G. S. 143- 139.1.
( Effective January 1, 2004 for sales made on and after that date; HB 1006, s. 14,
S. L. 03- 400.)
* Note: The definitions for mobility enhancing equipment and modular home were
both enacted as subdivision ( 21a). One of the definitions will have to be
recodified.
Modular homebuilder – ( 21b). This definition was added as a result of the levy of
a 2 ½ % State sales and use tax under G. S. 105- 164.4( a)( 8) on modular homes.
The term is defined as “ a person who furnishes for consideration a modular
home to a purchaser that will occupy the modular home. The purchaser can be a
person that will lease or rent the unit as real property.” As a result, the tax will be
collected by the manufacturer or other seller when he sells the modular home to
a dealer or homeowner. The sale by a dealer to the individual purchasing the
home will not be subject to tax.
( Effective January 1, 2004 for sales made on and after that date; HB 1006, s. 14,
S. L. 03- 400.)
Over- the- counter drug – ( 25a). This definition was added by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. The term is defined as “ a
drug that can be dispensed under federal law without a prescription and is
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required by 21 C. F. R. § 210.66 to have a label containing a ‘ Drug Facts’ panel
and a statement of its active ingredients.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Prepared food – ( 28). This definition was rewritten by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. Prepared food will continue
to be subject to the combined State and county tax, and as a result of the revised
definition and a change in the exemption of food from the State tax, some items
are taxable that were exempt under prior law.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Prescription – ( 29). This definition was added by the 2003 legislation bringing
North Carolina law closer to the standards that must be met to comply with the
national Streamlined Sales Tax Agreement. The term is defined as “ an order,
formula, or recipe issued orally, in writing, electronically, or by another means of
transmission by a physician, dentist, veterinarian, or another person licensed to
prescribe drugs.” North Carolina law previously defined “ prescription drug”; this
legislation defines “ prescription” and “ drug” separately. There is no substantive
change in the law.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Prewritten computer software – ( 29a). This definition was added by the 2003
legislation bringing North Carolina law closer to the standards that must be met
to comply with the national Streamlined Sales Tax Agreement. The term is
defined as “ computer software, including prewritten upgrades, that is not
designed and developed by the author or another creator to the specifications of
a specific purchaser. The term includes software designed and developed by the
author or another creator to the specifications of a specific purchaser when it is
sold to a person other than the specific purchaser.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Prosthetic device – ( 30a). This definition was added by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. The term includes a device
that artificially replaces a missing portion of the body, prevents or corrects a
physical deformity or malfunction, or supports a weak or deformed portion of the
body.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Tangible personal property – ( 46). This definition was amended by the 2003
legislation bringing North Carolina law closer to the standards that must be met
to comply with the national Streamlined Sales Tax Agreement. Electricity, water,
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gas, steam, and prewritten computer software are specifically set out as items
included in the term.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
G. S. 105- 164.4( a) – Maintain State Sales Tax Rate: The additional ½ % State
sales and use tax was extended. The tax was originally scheduled to be
repealed for sales made on or after July 1, 2003. The ½ % State tax is repealed
for sales made on and after July 1, 2005.
( Effective July 1, 2003; HB 397, s. 38.1, S. L. 03- 284.)
G. S. 105- 164.4( a)( 8) – Tax on Modular Homes: This new subdivision levies a
2 ½ % State tax on the sales price of a modular home, including accessories
attached when delivered to the purchaser. The retail sale is the sale of the
modular home to a modular homebuilder, who is defined as the person selling
the home to the purchaser who will be occupying the home. The effect of this
provision is that the manufacturer or other seller will be liable for collecting the
tax on the sale to the modular home “ dealer.” The sale of the home by the dealer
to the home owner/ occupant will not be taxable.
( Effective January 1, 2004 for sales made on and after that date; HB 1006, s. 15,
S. L. 03- 400.)
G. S. 105- 164.4B – Change in Sourcing Rules: This section was rewritten to
bring North Carolina law closer to the standards that must be met in order for the
State to comply with the national Streamlined Sales Tax Agreement. The statute
sets out sourcing principles for periodic rental payments for leases or rentals of
specific categories of tangible personal property; it also defines “ transportation
equipment.” There are special provisions for sourcing of direct mail. The
principles apply to both State and local taxes, if applicable.
( Effective July 15, 2003; HB 397, s. 45.3, S. L. 03- 284.)
G. S. 105- 164.4C( f) – Call Center Cap: A technical correction was made to
delete an obsolete reference to interstate service.
( Effective August 14, 2003; SB 97, s. 16( a), S. L. 03- 416.)
G. S. 105- 164.6( f) – Use Tax Collection: A statement was added to clarify that a
retailer required to obtain a certificate of registration is required to pay the use tax
levied under G. S. 105- 164.6.
( Effective August 14, 2003; SB 97, s. 17, S. L. 03- 416.)
G. S. 105- 164.6A( b) – Voluntary Collection of Use Tax: This subsection was
rewritten to provide that the collection period for sellers voluntarily collecting use
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tax cannot be more often than annually if the seller’s State and local tax
collections are less than one thousand dollars ($ 1,000) in a calendar year.
( Effective July 15, 2003; HB 397, s. 45.4, S. L. 03- 284.)
G. S. 105- 164.8( b) – Mail Order Sales: A new subdivision ( 8) was added to
include a retailer that is a holder of a wine shipper permit issued by the ABC
Commission pursuant to G. S. 18B- 1001.1 as a retailer engaged in business in
this State for the purpose of making mail order sales. A retailer holding a wine
shipper permit is required to collect sales or use tax on its retail sales of wine to
purchasers in the State.
( Effective October 1, 2003; SB 668, s. 13, S. L. 03- 402.)
G. S. 105- 164.13 – Exemptions and Exclusions: A technical correction was
made to the introductory language to this section to add the term “ services.” This
clarifies that exemptions and exclusions apply to both tangible personal property
and services on which tax is imposed.
( Effective August 14, 2003; SB 97, s. 18( a), S. L. 03- 416.)
The 2003 General Assembly added several new subdivisions to this section and
amended some of the existing subdivisions. The changes and their effective
dates are as follows:
Manufactured Products – ( 5). A technical change was made to update a
statutory reference to the definition of “ wholesale merchant.”
( Effective August 14, 2003; SB 97, s. 21, S. L. 03- 416.)
Medical Equipment – ( 12). This exemption was rewritten to bring North Carolina
law closer to standards that must be met in order for the State to comply with the
national Streamlined Sales Tax Agreement. The exemption applies to sales of
prosthetic devices, mobility enhancing equipment sold on prescription, durable
medical equipment sold on prescription, and durable medical supplies sold on
prescription. The application of tax for most items remains the same as under
prior law. However, some articles that were exempt under prior law regardless of
to whom they were sold will now only be exempt when sold on prescription. An
example of this is a wheelchair, which is now considered mobility enhancing
equipment and is exempt only when sold on prescription.
( Effective July 15, 2003; HB 397, s. 45.5, S. L. 03- 284.)
Drugs – ( 13). This exemption was rewritten to bring North Carolina closer to the
standards that must be met in order for the State to comply with the national
Streamlined Sales Tax Agreement. The exemption applies to drugs required by
federal law to be dispensed only on prescription, over- the- counter drugs sold on
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prescription, and insulin. There is no substantive change in the application of tax
for these items.
( Effective July 15, 2003; HB 397, s. 45.5, S. L. 03- 284.)
Worthless Accounts – ( 15). This exemption was amended to clarify that
municipalities that sell electricity are entitled to the deduction for worthless
accounts provided all the conditions for charge- off that would apply if the
municipality were subject to income tax were met.
( Effective July 27, 2003; SB 236, s. 11, S. L. 03- 349.)
Custom Computer Software – ( 43). This exemption was rewritten. Custom
computer software and the portion of prewritten computer software that is
modified or enhanced if the modification or enhancement is designed and
developed to the specifications of a specific purchaser and the charges for the
modification or enhancement are separately stated are exempt from tax. Prior to
this change, prewritten software that was modified or enhanced based on the
specifications of a specific customer was considered custom computer software
and the total charge was exempt from the tax. The canned or prewritten portion
of software is not exempt as a result of customized modification or enhancement.
( Effective July 15, 2003; HB 397, s. 45.5, S. L. 03- 284.)
Computer Software Delivered Electronically – ( 43a). This exemption was added
to provide an exemption for computer software delivered electronically and by
load and leave. Under prior law, computer software delivered electronically was
not taxed since it was not considered to constitute tangible personal property.
( Effective July 15, 2003; H. B. 397, s. 45.5, S. L. 03- 284.)
Vending Items - ( 50). This exemption was rewritten. Until January 1, 2004, fifty
percent ( 50%) of the sales price of tangible personal property sold through
vending machines except for closed container soft drinks and tobacco products is
taxable; one hundred percent ( 100%) of the sales price of tobacco products and
closed container soft drinks is taxable. Effective January 1, 2004, the partial
exemption will include closed container soft drinks; therefore, only fifty percent
( 50%) of the sales price of closed container soft drinks sold through vending
machines will be taxable.
( Effective January 1, 2004; HB 397, s. 45.5A, S. L. 03- 284.)
Water Delivered Through Main Lines or Pipes - ( 51). This exemption was added;
formerly water delivered through main lines or pipes was excluded from tax
under the definition of tangible personal property. Water delivered in this manner
continues to be exempt.
( Effective July 15, 2003; HB 397, s. 45.5, S. L. 03- 284.)
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State Agencies - ( 52). This new exemption provides that items subject to sales
tax under G. S. 105- 164.4, excluding electricity and telecommunications service,
sold to State agencies are not subject to tax at the time of purchase. The
exemption is effective for sales made on or after July 1, 2004. State agencies
will be required to secure an exemption number from the Department and
provide the number to vendors in order to exempt a sale from tax. The
exemption does not apply to purchases made by contractors in connection with
performance contracts entered into with State agencies.
( Effective July 1, 2004; SB 100, s. 1, S. L. 03- 431.)
G. S. 105- 164.13B – Basis for Exempting Food: This section was rewritten and
changes the basis for exempting food from State sales or use tax. With the
exception of candy, the exemption no longer references items for home
consumption and items eligible under the Federal Food Stamp Program. The
following items are subject to State and local tax: alcoholic beverages, tobacco
products, candy ( unless purchased for home consumption and exempt if
purchased under the food stamp program), soft drinks, prepared food, dietary
supplements, and food sold through vending machines.
( Effective July 15, 2003; HB 397, s. 45.6, S. L. 03- 284.)
Subdivision ( a)( 6) is repealed effective January 1, 2004. As a result, all candy
will be exempt from the State tax and subject to only the 2% local tax.
( Effective January 1, 2004; HB 397, s. 45.6B, S. L. 03- 284.)
G. S. 105- 164.13B( b) – Administration of Food Tax: This subsection was
added to provide that the local sales and use tax on food is to be administered as
if it were imposed as a State sales and use tax.
( Effective October 1, 2003; HB 397, s. 45.6A, S. L. 03- 284.)
G. S. 105- 164.13C – Sales Tax Holiday: This section was rewritten to delete
printers, printer supplies, and educational software from the list of items that
qualify for the exemption during the sales tax holiday. Computers with a sales
price of three thousand five hundred dollars ($ 3,500) or less per item will
continue to be exempt during the holiday. Sales involving layaway contracts and
similar deferred payment and delivery transactions will no longer be excluded
from the exemption. School supplies with a sales price of one hundred dollars
($ 100) or less per item will continue to be exempt.
( Effective October 1, 2003; HB 397, 45.7, S. L. 03- 284.)
G. S. 105- 164.14( b) – Refunds to Nonprofit Entities and Hospital Drugs: This
subsection was amended to clarify that refunds of sales and use taxes are
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authorized for purchases of taxable services, other than electricity and
telecommunications service. There was no substantive change in the law.
( Effective August 14, 2003; SB 97, s. 18( b), S. L. 03- 416.)
G. S. 105- 164.14( c) – Refunds to Governmental Agencies: This subsection
was amended to clarify that refunds of sales and use taxes are authorized for
purchases of taxable services, other than electricity and telecommunications
service. There was no substantive change in the law.
( Effective August 14, 2003; SB 97, s. 18( c), S. L. 03- 416.)
G. S. 105- 164.14( c) – Refunds to Joint Purchasing Agencies of Local School
Administrative Units: This subsection was rewritten to add a new entity to the
list of governmental agencies eligible for a refund of sales and use tax. New
subdivision ( 2c) provides that a joint agency created by interlocal agreement
among local school administrative units to jointly purchase food service- related
materials, supplies, and equipment on their behalf is eligible for refunds.
( Effective for taxes paid on or after July 1, 2003; SB 100, s. 2, S. L. 03- 431.)
Subdivision ( 20) was rewritten to clarify that the refund provision applies to
services eligible for refund as well as tangible personal property.
( Effective August 14, 2003; SB 97, s. 18( d), S. L. 03- 416.)
Subdivision ( 21) was rewritten to reflect a change in the name of the
governmental entity from the University of North Carolina Hospitals at Chapel Hill
to the University of North Carolina Health Care System.
( Effective August 14, 2003; SB 97, s. 23, S. L. 03- 416.)
G. S. 105- 164.14( e) – Refunds of Local Tax to State Agencies: This
subsection was amended to clarify that refunds of sales and use taxes are
authorized for purchases of taxable services, other than electricity and
telecommunications service. There was no substantive change in the law.
( Effective August 14, 2003; SB 97, s. 18( e), S. L. 03- 416.)
This subsection was further amended to remove direct purchases of tangible
personal property as items eligible for refund since State agencies will be exempt
from tax on these purchases as of July 1, 2004.
( Effective July 1, 2004, SB 100, s. 3, S. L. 03- 431.)
G. S. 105- 164.16( b1) – Due Date for Monthly Returns: This subsection was
rewritten to change the due date for monthly sales and use tax returns from the
15th of the month following the calendar month covered by the return to the 20th
of the month. This change brings North Carolina law closer to the standards that
must be met in order for the State to comply with the national Streamlined Sales
North Carolina Department of Revenue
Tax Administration Page 27 2003 Tax Law Changes
Tax Agreement. A return for the month of October 2003 will be the first return
affected by the change in due date.
( Effective October 1, 2003; HB 397, s. 45.8, S. L. 03- 284.)
G. S. 105- 164.27A( a) – Direct Pay Permit for Direct Mail: This subsection was
rewritten to allow purchasers of direct mail to apply to the Secretary of Revenue
for a direct pay permit. A qualifying purchaser is authorized to make purchases
of direct mail without payment of sales or use tax to the vendor. The permit may
only be used to purchase direct mail. The purchaser will be liable for remitting
use tax on the taxable portion of printed material used in North Carolina.
( Effective July 15, 2003; HB 397, s. 45.9, S. L. 03- 284.)
G. S. 105- 164.27A( b) – Direct Pay Permit for Telecommunications: This
subsection was amended to remove an obsolete reference to interstate
telecommunications.
( Effective August 14, 2003; SB 97, s. 16( b), S. L. 03- 416.)
G. S. 105- 164.29A – State Government Exemption Process: This section was
added to provide the process by which State agencies must obtain an exemption
number from the Department in order to be able to purchase items without
payment of sales and use tax.
( Effective January 1, 2004; SB 100, s. 4, S. L. 03- 431.)
G. S. 105- 164.44G – Distribution to Counties: This new section was added
and sets out the distribution made to counties of 20% of the taxes collected on
the sales of modular homes. The amount will be included with local tax revenue
not attributable to a particular county and will be distributed monthly in the same
manner as the third one- half cent local tax.
( Effective January 1, 2004; HB 1006, s. 16, S. L. 03- 400.)
G. S. 105- 187.18 – Scrap Tire Disposal Tax: A technical correction was added
to clarify that the scrap tire disposal tax is not applicable to sales that a state
cannot constitutionally tax.
( Effective August 14, 2003; SB 97, s. 19( a), S. L. 03- 416.)
G. S. 105- 187.23 – White Goods Disposal Tax: A technical correction was
added to clarify that the white goods disposal tax is not applicable to sales that a
state cannot constitutionally tax.
( Effective August 14, 2003; SB 97, s. 19( b), S. L. 03- 416.)
North Carolina Department of Revenue
Tax Administration Page 28 2003 Tax Law Changes
G. S. 105- 187.33 – Dry- Cleaning Solvent Tax: A technical correction was
added to clarify that the dry- cleaning solvent tax is not applicable to sales that a
state cannot constitutionally tax.
( Effective August 14, 2003, SB 97, s. 19( c), S. L. 03- 416.)
G. S. 105- 466( c) – Advance Notice of New Tax or Rate Change: This
subsection was amended to bring North Carolina law closer to the standards that
must be met to comply with the national Streamlined Sales Tax Agreement. A
provision was added to make the applicability of a new tax or tax rate change to
purchases made from printed catalogs effective on the first day of a calendar
quarter after a minimum of 120 days from the date the Secretary notifies the
seller of the new tax or tax rate change.
( Effective July 15, 2003; HB 397, s. 45.10, S. L. 03- 284.)
G. S. 105- 469 – Collection and Administration of Tax on Food: This section
was rewritten to provide that the 2% local tax on food is to be administered as if it
were a State tax. A specific method of allocating the tax on food to local
government is set out.
( Effective October 1, 2003; HB 397, s. 45.11( a), S. L. 03- 284; and SB 97, s.
27( a), S. L. 03- 416.)
G. S. 105- 472( a) – Local Sales Tax Distribution: This subsection was
amended to provide that amounts collected by electronic funds transfer
payments are included in the distribution for the month in which the return that
applies to the payment is received.
( Effective July 1, 2003; SB 236, s. 5, S. L. 03- 349.)
G. S. 105- 521 – Hold Harmless Distribution: The date for which the hold
harmless distribution made pursuant to Article 44 must be made to applicable
local governments was changed from September 15 to August 15 of the year.
The distribution is intended to be extended through 2012.
( Effective July 1, 2003; HB 397, s. 37.1, S. L. 03- 284.)
INSURANCE PREMIUMS TAX
G. S. 58- 6- 25 – Insurance Regulatory Charge; Conforming Change: The
percentage rate to be used in calculating the insurance regulatory charge under
this statute is 5% for the 2003 calendar year. This charge is a percentage of
gross premiums tax liability. Subsections ( a) and ( e) were amended to conform
to changes in G. S. 105- 228.5 that subject Article 65 corporations to the same
rate of tax as other insurance contracts.
North Carolina Department of Revenue
Tax Administration Page 29 2003 Tax Law Changes
( 2003 regulatory rate effective June 30, 2003; HB 397, s. 33.1( a), S. L. 03- 284;
conforming change effective for taxable years beginning on or after January 1,
2004 and repealed for taxable years beginning on or after the January 1
immediately following the date the Commissioner of Insurance certifies to the
Department of Revenue that there are no remaining Article 65 corporations
offering medical service plans or hospital service plans; HB 397, s. 43.2, S. L. 03-
284.)
G. S. 105- 228.5 – Tax Scope, Rate, and Technical Changes: The 2001
General Assembly made numerous changes to this section that affect tax years
2002, 2003, and 2004. The section was amended several times to adjust its
scope and rate. The first act that amended this section made health
maintenance organizations ( HMOs) subject to a gross premiums tax at the rate
of 0.833% and increased the rate for Article 65 corporations from 0.5% to
0.833%. Both of these changes were to be effective for tax year 2002. In
addition to these changes, the first act that amended this section increased the
rate for both HMOs and Article 65 corporations to 1% effective for the 2003 tax
year.
The changes made by the first act were undone by subsequent acts. The
subsequent acts delayed the effective date of the application of the tax to HMOs
and of the tax increase to Article 65 corporations until tax year 2003. Under
these acts, the tax rate for both HMOs and Article 65 Corporations is 1.1%
effective for the 2003 tax year. The rate decreases to 1% for tax years beginning
on or after January 1, 2004.
The 2003 General Assembly further revised the scope and rate of tax with
respect to Article 65 corporations. Effective for taxable years beginning on or
after January 1, 2004, gross collections from membership dues received by
Article 65 corporations are subject to the same tax rate as other insurance
contracts. Therefore, the tax rate for Article 65 corporations increases from 1.1%
to 1.9% for 2004 instead of decreasing to 1%.
Subsection ( f) of this section requires taxpayers to prepay their tax liability in
three installments. Special rules apply to HMOs for the tax year 2003 and to
Article 65 corporations for the tax year 2003, 2004, and 2005. HMOs must
prepay their 2003 tax liability and Article 65 corporations must prepay their 2003,
2004, and 2005 tax liability in two installments, rather than three. One- half of the
estimated liability is due with each installment. The installments are due on April
15 and June 15, 2003. An underpayment of estimated tax accrues interest. The
penalties in Article 9 of Chapter 105 apply to these estimated tax payments.
( HMOs subject to tax originally effective January 1, 2002; SB 1005, s. 34.22, S. L.
01- 424; revision to the effective date, the establishment of the 1.1% tax rate, and
the exception to the provisions of G. S. 105- 228.5( f) effective for tax year 2003;
decrease in the 1.1% rate to 1% effective for tax years beginning on or after
January 1, 2004; HB 748, s. 2, S. L. 01- 489; increase in tax rate for Article 65
North Carolina Department of Revenue
Tax Administration Page 30 2003 Tax Law Changes
corporations effective for taxable years beginning on or after January 1, 2004
and repealed for taxable years beginning on or after the January 1 immediately
following the date the Commissioner of Insurance certifies to the Department of
Revenue that there are no remaining Article 65 corporations offering medical
service plans or hospital service plans; HB 397, s. 43.2, S. L. 03- 284.)
GENERAL ADMINISTRATION
G. S. 105- 228.90( b)( 1b) – Reference to the Internal Revenue Code Updated:
This subdivision was amended twice during the 2003 session. The first
amendment updated the reference to the Internal Revenue Code from May 1,
2002 to January 1, 2003. Any amendments to the Internal Revenue Code
enacted in 2002 that increase North Carolina taxable income for the 2002 taxable
year become effective for taxable years beginning on or after January 1, 2003.
This amendment conforms North Carolina tax law to the tax provisions of the
federal Clergy Housing Allowance Clarification Act of 2002, P. L. 107- 181,
enacted on May 20, 2002, which clarified the amount that may be excluded from
gross income by a minister for a rental allowance received as part of the
minister’s compensation.
The second amendment updated the reference to the Code from January 1,
2003 to June 1, 2003. This implies that North Carolina has conformed to all of
the provisions of the federal Jobs and Growth Tax Relief Reconciliation Act of
2003, enacted on May 28, 2003, which included increased expensing for small
businesses under Code section 179 and changes to bonus depreciation that
increase the rate. However, existing provisions in G. S. 105- 130.5( a) and G. S.
105- 134.6( c) and amendments to those provisions result in the State not
immediately conforming with the increased bonus depreciation allowance.
( First amendment effective April 24, 2003; HB 320, ss. 1 and 2, S. L. 03- 25;
second amendment effective June 30, 2003; HB 397, s. 37A. 1, S. L. 03- 284.)
G. S. 105- 228.90( b)( 4d) – Pass- Through Entity Defined: This subdivision was
amended to include the definition for a pass- through entity. Previously, the
definition for a pass- through entity was codified in G. S. 105- 163.010( 7). A pass-through
entity is an entity or business, including a limited partnership, a general
partnership, a joint venture, a Subchapter S Corporation, or a limited liability
company, all of which is treated as owned by individuals or other entities under
the federal tax laws, in which the owners report their share of the income, losses,
and credits from the entity or business on their State income tax returns. This
change is part of a series of changes that consolidated the definition of a pass-through
entity in one statute and cross- referenced that definition in other statutes.
( Effective August 14, 2003; SB 97, s. 4( d), S. L. 03- 416.)
North Carolina Department of Revenue
Tax Administration Page 31 2003 Tax Law Changes
G. S. 105- 242( a)( 2) – Avoid Duplicative Reporting of Sales of Seized
Property: This subdivision was amended to no longer require the Department of
Revenue to file a report of seized property with the clerk of superior court as long
as the sale is otherwise publicly reported.
The Department is authorized to collect delinquent taxes through the levy upon
and sale of the taxpayer’s real or personal property. The Department may either
direct the sheriff to levy upon and sell property or it may levy upon the property
itself. When the Department levies upon personal property without the use of the
sheriff, the actual sale of the property is conducted by the Department of
Administration’s State Surplus Property section. The State Surplus Property
section posts information related to bids and sales of seized property both online
and in writing. Since the Department of Administration makes a report of the
seized property sold through surplus property sales, the Department of Revenue
will not have to file a report of sale with the clerk of superior court as required
under G. S. 1- 339.63.
( Effective July 27, 2003; SB 236, s. 2, S. L. 03- 349.)
G. S. 105- 243.1( b) – Outsourcing: This subsection was amended to extend the
Department’s authority to outsource the collection of in- state tax debts to October
1, 2005. Previously, the authority to outsource collection of in- state tax debts
was scheduled to expire October 1, 2003.
( Effective July 27, 2003; SB 236, s. 3, S. L. 03- 349.)
G. S. 105- 259( b)( 7) – Conforming Change: This statute was amended to allow
the Department to exchange tax information with the law enforcement officers of
the Department of Crime Control and Public Safety. This change was made
necessary with the reorganization of the Department of Transportation, Division
of Motor Vehicles section.
( Effective July 27, 2003; SB 236; s. , S. L. 2003- 349.)
G. S. 105- 269.6 – Candidates Financing Fund Election Repealed: This statute
allowed an individual to contribute all or part of the individual’s income tax refund
to the North Carolina Candidates Financing Fund. The statute was repealed,
effective for the 2003 tax year. Few taxpayers contributed to the Fund and the
revenue in the Fund was ever disbursed to candidates because they either did
not meet the qualifications for receipt of the funds or did not apply for the funds.
The General Assembly repealed this statute as part of the legislation establishing
nonpartisan judicial elections and a method for providing an alternative means of
financing campaigns of candidates for the North Carolina Supreme Court or
Court of Appeals who accept fundraising and spending limits. A new fund is
established in Article 22D of Chapter 163 of the General Statutes, called the
North Carolina Department of Revenue
Tax Administration Page 32 2003 Tax Law Changes
North Carolina Public Campaign Financing Fund. A new individual income tax
check- off will appear on the 2003 income tax return for that Fund.
( Effective for taxable years beginning on or after January 1, 2003; SB 1054, s.
6( a), S. L. 02- 126.)
G. S. 105- 269.14 – Use Tax Line on the Individual Income Tax Return: The
statute was amended to extend the inclusion of a line on the individual income
tax return to report use tax on non- business purchases through the 2004 tax
year.
( Effective June 30, 2003; HB 397, s. 44.1, S. L. 03- 284.)
PROPERTY TAX
G. S. 105- 273( 13) Definition of Real Property: This amendment changes the
definition of real property to include a manufactured home on land in which the
owner of the manufactured home has a leasehold interest pursuant to a lease
with a primary term of at least 20 years for the real property on which the
manufactured home is affixed and where the lease expressly provides for
disposition of the manufactured home upon termination of the lease. The home
has to meet all the other parts of this definition which are: it is a residential
structure; has the moving hitch, wheels, and axles removed; is placed upon a
permanent foundation either on land owned by the owner of the manufactured
home or on lease land as defined above.
( Effective August 7, 2003; HB 1006, s. 4, S. L. 2003- 400)
G. S. 105- 275( 8) c – Clarify Property Tax Exclusion for Property used to
Reduce Cotton Dust: This subdivision was rewritten to include in the current
property tax exclusion, all parts of a ventilation or air conditioning system that are
integrated into a system used for the prevention or reduction of cotton dust,
except for chillers and cooling towers. Previously, if the air conditioning or
ventilation system was used for any additional purpose other than cotton dust
removal, they were not considered to qualify for the exclusion.
( Effective July 1, 2003; HB 397, s. 43A. 1; S. L. 2003- 284)
G. S. 105- 277.11, G. S. 105- 284, G. S. 159- 107, and G. S. 159- 108 - Taxation of
Property Subject to a Development Financing District Agreement: G. S.
105- 277.11 is reenacted and rewritten to read: Property that is in a development
financing district established pursuant to G. S. 160A- 515.1 or G. S. 158- 7.3 and
that is subject to an agreement entered into pursuant to G. S. 159- 108, shall,
pursuant to Article V, Section 14 of the North Carolina Constitution, be assessed
for taxation at the greater of its true value or the minimum value established in
the agreement.
North Carolina Department of Revenue
Tax Administration Page 33 2003 Tax Law Changes
G. S. 105- 284 is amended by adding a new subsection ( d) which reads: Property
that is in a development financing district and that is subject to an agreement
entered into pursuant to G. S. 159- 108 shall be assessed at its true value or at
the minimum value set out in the agreement, whichever is greater.
G. S. 159- 108( c) is rewritten to require the county assessor to assess property
subject to a development financing district agreement at its true value or at the
minimum value set out in the agreement, whichever is greater.
G. S. 159- 107( d) is rewritten to require that the county assessor determine the
incremental valuation of the district each year. The incremental value is the
difference between current value and the base valuation of the district. If there is
no incremental valuation all proceeds of the taxes are retained by the county, city
or special district. If there is an incremental valuation the proceeds are
distributed as provided in 159- 107( d)( 2).
G. S. 159- 108( d) is rewritten to require that the minimum value set out in a
development financing district agreement be adjusted after a county reappraisal
of real property to ensure the taxing unit receives the same amount of tax on the
property.
( Effective August 7, 2003; SB 725, ss. 2,20, and 21, S. L. 2003- 403)
G. S 105- 299 - Employment of Experts: Amendment moves a comma to make
a technical correction, which does not change the meaning.
( Effective August 14, 2003; SB 97, s. 9, S. L. 2003- 416)
G. S. 105- 307, G. S. 105- 330.4 and G. S. 105- 360 - Waive Various Deadlines,
Fees and Penalties for Deployed Military Personnel. Allows deployed military
personnel 90 days after the end of their deployment to pay property taxes at par.
Allows deployed military personnel 90 days after the end of their deployment to
list property.
( Effective July 4, 2003; SB 936, ss. 4( a) and 4( b), S. L. 2003- 300)
G. S. 105- 358( a) - Waiver of Worthless Check Penalty: Amends 105- 358( a) by
removing “ ten percent ( 10%)” and leaving just “ penalty”. Clarifies that the
collector may upon making a record of the reasons therefore reduce or waive the
penalty imposed on giving a worthless check under G. S. 105- 357( b)( 2).
( Effective August 14, 2003; SB 97, s. 10, S. L. 2003- 416)
G. S. 105- 361 – Tax Certification: This act allows an internet- based alternative
to property tax certification procedures.
North Carolina Department of Revenue
Tax Administration Page 34 2003 Tax Law Changes
The governing body of a taxing unit may adopt an ordinance to allow a person to
rely on information obtained from the taxing unit’s web site as if it were a
certificate issued pursuant to G. S. 105- 361( a). The ordinance may provide for
disclaimers concerning the information. Any person who relies on the web site
information must keep a copy and present a copy of the information as
necessary. The tax collector shall be liable on the tax collector’s bond for any
loss to the taxing unit arising from an understatement of the taxes contained in
the information available on the web site unless the taxing unit’s ordinance
provides the disclaimers.
( Effective August 7, 2003; HB 972, s. 1, S. L. 2003- 399)
G. S. 158- 7.3 and G. S. 160A- 466 – Joint Undertaking of Development
Projects: These acts amend G. S. 158- 7.3 and G. S. 160A- 466 to authorize local
governments that are jointly undertaking a development project to enter into
agreements to finance the project. The local governments may agree to place
the proceeds from some or all property taxes levied on the park or site into a
common fund or transfer those proceeds to a nonprofit corporation or other
entity.
( Effective August 14, 2003; HB 1301, ss. 1 and 2, S. L. 2003- 417)
G. S. 159- 11 – Revenue Neutral Tax Rate: Amendment requires the local
government budget officer to publish the revenue- neutral tax rate in years when
there is a general revaluation of real property. The revenue- neutral tax rate is
the rate the is estimated to produce revenue for the next fiscal year equal to the
revenue that would have been produced for the next fiscal year by the current tax
rate if no reappraisal had occurred.
( Effective July 26, 2003; SB 511, s. 1, S. L. 2003- 264)
MOTOR FUELS TAX
G. S. 105- 449.49 – Temporary Permits: This statute was amended to reduce
the maximum time a motor carrier can operate in the State using a temporary
permit from 20 days to 3 days, rather than obtaining a license.
( Effective January 1, 2004; SB 236, s. 10.1, S. L. 2003- 349.)
G. S. 105- 449.60( 33) – Clarifying: This statute was amended to clarify the tank
wagon definition to include vehicles that are not a transport truck although they
are designed to carry at least 1,000 gallons. The current definition appears to
exclude those tank wagon vehicles whose individual compartments are less than
1,000 gallons but are designed to carry in excess of 1,000.
( Effective January 1, 2004; SB 236, s. 10.2, S. L. 2003- 349.)
North Carolina Department of Revenue
Tax Administration Page 35 2003 Tax Law Changes
G. S. 105- 449.65( a) – License Requirement: This statute was amended to
require a taxpayer that imports tax- paid motor fuel from an out- of- state terminal
into North Carolina to be licensed as a distributor. Currently the statutes allow the
distributor’s license to be optional, however, if the product is being imported the
taxpayer must then register as a licensed importer and file a tax return. A
distributor license allows the taxpayer to import and export product.
( Effective January 1, 2004; SB 236, s. 10.3, S. L. 2003- 349.)
G. S. 105- 449.67 – Clarification: This statute was amended to clarify that
distributors operating solely within this State are not required to obtain a license.
( Effective January 1, 2004; SB 236, s. 10.4, S. L. 2003- 349.)
G. S. 105- 449.69( d) & ( e) – Repeal: This statute was amended to remove the
reporting requirement of the license- holder to notify the Department of any states
to which they plan to export or from which they plan to import motor fuel. There
are no means for tracking this information once the application has been
submitted. The taxpayer, by virtue of the supplier license, is able to import and
export motor fuel.
( Effective January 1, 2004; SB 236, s. 10.5, S. L. 2003- 349.)
G. S. 105- 449.72( a)( 2) – Bond Increase: This statute was amended to increase
the variable bond amount of licensees to a maximum of five hundred thousand
dollars ($ 500,000). The current bond amount of two hundred fifty thousand
dollars ($ 250,000) was last adjusted in January 1991.
( Effective January 1, 2004; SB 236, s. 10.6, S. L. 2003- 349.)
G. S. 105- 449.73 – Denial of License: This statute was amended to enable the
Department to deny a motor fuel license to a taxpayer that fails to file a return or
pay a tax due in other North Carolina Revenue Tax Laws.
( Effective January 1, 2004; SB 236, s. 10.7, S. L. 2003- 349.)
G. S. 105- 449.86( a)( 1) – Repeal: This statute was amended to conform the
statutes with the legislative change made last session to exempt local
governments from the motor fuel tax.
( Effective January 1, 2004; SB 236, s. 10.8, S. L. 2003- 349.)
G. S. 105- 449.115( b) – Technical: This statute was amended to remove the
requirement that shipping documents must be machine- printed by the operator of
a bulk plant. This requirement was imposed inadvertently when the statutes were
reorganized. The act does not change the requirement that terminal operators
must machine- print shipping documents.
( Effective January 1, 2004; SB 236, s. 10.9, S. L. 2003- 349.)
North Carolina Department of Revenue
Tax Administration Page 36 2003 Tax Law Changes
G. S. 105- 449.117 – Enforcement: This statute was amended to clarify the
Department's authority to investigate illegal use of non- tax- paid fuel for highway
use using State equipment. Currently the statutes exempt from tax the sales of
motor fuel sold to the State of North Carolina.
( Effective January 1, 2004; SB 236, s. 10.10, S. L. 2003- 349.)
G. S. 105- 449.123( a) – Marking Requirements: This statute was amended to
clarify that storage facilities for dyed kerosene must be clearly marked for non- tax
use only, just like the storage facilities for dyed diesel fuel. It also provides that
the dispensing device for dyed fuel must be clearly marked as non- tax use only.
( Effective January 1, 2004; SB 236, s. 10.11, S. L. 2003- 349.)
G. S. 119- 15 – Definitions: This statute was amended to include definitions in
the inspection tax laws for airport terminals and terminal operators. Jet fuel and
kerosene is being delivered from the pipeline directly to the airports. This
bypasses the motor fuels terminals therefore bypassing product accountability.
The Internal Revenue Service has licensed these terminals and the terminal
operators are reporting the deliveries to the airports.
( Effective January 1, 2004; SB 236, s. 10.12, S. L. 2003- 349.)
G. S. 119- 15.1 – License Requirement: This statute was amended to require
kerosene terminal operators to be licensed and to file reports. Currently, jet fuel
and kerosene are being delivered from the pipeline directly to airports. This
method of delivery bypasses the motor fuels terminals and thereby bypasses the
record- keeping requirements that help ensure that the Department can uniformly
enforce the tax statutes. Kerosene terminal operators are currently subject to tax.
The Internal Revenue Service licenses these terminals and the terminal
operators must report deliveries to the airports. With the exception of adding the
license requirement for the kerosene terminal operators, the rest of the text was
reformatted from G. S. 119.16.2 to align the text in the same manner as Article
36C.
( Effective January 1, 2004; SB 236, s. 10.14, S. L. 2003- 349.)
G. S. 119- 15.2 – License Application: This statute was amended to identify the
information required to obtain a license under the kerosene statutes. This text
was reformatted from G. S. 119.16.2 to align the text in the same manner as
Article 36C.
( Effective January 1, 2004; SB 236, s. 10.14, S. L. 2003- 349.)
G. S. 119- 15.3 – Bond Requirement: This statute was amended to identify the
bond requirements to obtain certain licenses under the kerosene statutes. This
North Carolina Department of Revenue
Tax Administration Page 37 2003 Tax Law Changes
text was reformatted from G. S. 119.16.2 to align the text in the same manner as
Article 36C.
( Effective January 1, 2004; SB 236, s. 10.14, S. L. 2003- 349.)
G. S. 119- 18( a) – Imposition of Tax: This statute was amended to impose the
inspection tax on dyed diesel. Currently the statutes impose the inspection tax
on all highway fuels, jet fuel, and aviation gasoline. Inspection tax is also
imposed on dyed kerosene, which is used for heating or other non- highway
purposes.
This statute also requires a kerosene terminal operator to file a return in
accordance with the provisions under G. S. 105- 449.100.
( Effective January 1, 2004; SB 236, s. 10.15, S. L. 2003- 349.)
G. S. 119- 18( a1) – Deferred Payment: This statute was added to provide a
licensed kerosene distributor the same benefits of deferred payments and
discounts that a licensed motor fuel distributor receives. Finally, this Part
reorganizes and modernizes the language of the kerosene licensing statutes.
( Effective January 1, 2004; SB 236, s. 10.16, S. L. 2003- 349.)
DEBT SETOFF
G. S. 105A- 2( 6) – Definition of Local Agency Expanded: The definition of
“ Local agency” has been expanded to include water and sewer authorities. As a
result, water and sewer authorities may submit debts to the Department for
collection under the Setoff Debt Collection Act.
( Effective January 1, 2004, and applies to income tax refunds determined on or
after that date; SB 529, s. 1, S. L. 03- 333.)

North Carolina
2003 Tax Law Changes
North Carolina Department of Revenue
Tax Administration
North Carolina Department of Revenue
Tax Administration Page 1 2003 Tax Law Changes
PREFACE
This document is designed for use by personnel in the North Carolina
Department of Revenue. It is available to those outside the Department as a
resource document. It gives a brief summary of the following tax law changes:
( 1) Changes made by prior General Assemblies that take effect for tax year
2003. Each change enacted by a prior General Assembly is also discussed
in the Department’s Tax Law Change document for the year the change
was enacted.
( 2) Changes made by the 2003 General Assembly, regardless of when they
take effect.
The changes are listed by type of tax. The order of the tax types is their order in
the General Statutes, except for local sales and use tax changes. The local
sales and use tax changes follow the State sales and use tax changes, and both
changes are grouped under the heading “ Sales and Use Tax.” Within a tax type,
the changes are listed in numerical order. The document does not include law
changes that affect the Department of Revenue but do not affect the tax laws.
For further information on a tax law change, refer to the legislation that made the
change. Administrative rules, bulletins, directives, and other instructions issued
by the Department, as well as opinions issued by the Attorney General’s Office,
may provide further information on the application of a tax law change.
North Carolina Department of Revenue
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Table of Contents
Type of Tax Page
I. Estate Tax............................................................................................ 3
II. Tobacco Products License and Excise Taxes ..................................... 3
III. Alcoholic Beverage License and Excise Taxes .................................... 4
IV. Corporate Franchise Tax...................................................................... 5
V. Tax Incentives for New and Expanding Businesses ............................ 5
VI. Historic Rehabilitation Tax Credits ....................................................... 7
VII. Low- Income Housing Tax Credits ........................................................ 9
VIII. Corporate Income Tax ......................................................................... 9
IX. Individual Income Tax .......................................................................... 13
X. Tax Credits for Qualified Business Investments................................... 16
XI. Withholding of Income Tax................................................................... 17
XII. Sales and Use Tax............................................................................... 17
XIII. Insurance Premiums Tax ..................................................................... 28
XIV. General Administration......................................................................... 30
XV. Property Tax......................................................................................... 32
XVI. Motor Fuels Tax ................................................................................... 34
XVII. Debt Set- Off ......................................................................................... 37
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ESTATE TAX
G. S. 105- 32( b) – Calculation of Estate Tax Under Prior Law: The 2002
General Assembly modified the formula for calculating North Carolina estate tax
for estates that include property located in North Carolina and in one or more
other states. This subsection was amended so that if using the new formula
creates an increase in tax for a decedent dying before August 22, 2002, the
estate tax may be calculated under prior law.
( Effective January 1, 2002; and applies to estates of decedents dying on or after
that date, SB 97, s. 1, S. L. 03- 416.)
G. S. 105- 32.2( b) Delay Sunset of Estate Tax: The federal Economic Growth
and Tax Relief Act of 2001 made changes to the federal estate tax laws by
increasing the amount excluded from federal estate tax and by phasing out the
state death tax credit over four years beginning in 2002. The federal changes
were effective for estates of decedents dying on or after January 1, 2002.
In 2002, the General Assembly conformed North Carolina’s exclusion amounts to
the federal exclusion amounts. However, G. S. 105- 32.2( b) was amended to
provide that the North Carolina estate tax is equal to the state death tax credit for
federal purposes before the phase- out of the federal credit. The amendment was
scheduled to sunset effective for estates of decedents dying on or after January
1, 2004.
The 2003 General Assembly amended this subsection by delaying the sunset to
July 1, 2005. This means that the North Carolina estate tax will continue to be
equal to the state death tax credit for federal purposes without regard to the
phase- out and termination of the federal credit.
( Effective for estates of decedents dying on or after July 1, 2005. HB 397, s.
37A. 5, S. L. 03- 284.)
TOBACCO PRODUCTS LICENSE AND EXCISE TAXES
G. S. 105- 113.21 – Repeal of Cigarette Tax Discount: Subsection ( a) of this
section was repealed to eliminate the 4% discount previously allowed to cigarette
distributors who both timely filed the monthly cigarette tax report and timely paid
the cigarette tax due. Subsection ( b) was rewritten to delete language regarding
the discount to conform with the repeal of subsection ( a).
( Effective for reporting periods beginning on or after August 1, 2003; HB 397, s.
45A. 1( a), S. L. 03- 284.)
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G. S. 105- 113.35( c) – Conforming Change: This subsection was amended to
delete language regarding the discount against the tax on other tobacco products
to conform with the changes to G. S. 105- 113.39 that eliminated the discount.
( Effective for reporting periods beginning on or after August 1, 2003; HB 397, s.
45A. 1( b), S. L. 03- 284.)
G. S. 105- 113.39 – Repeal of Discount Against Tax on Other Tobacco
Products: This section was repealed to eliminate the 4% discount previously
allowed to wholesale dealers or retail dealers who both timely filed the monthly
tax on other tobacco products report and timely paid the tax due.
( Effective for reporting periods beginning on or after August 1, 2003; HB 397, s.
45A. 1( c), S. L. 03- 284.)
ALCOHOLIC BEVERAGE LICENSE AND EXCISE TAXES
G. S. 105- 113.68( a) – Definition Added: This subsection was amended by
adding new subdivision ( 15) to define “ Wine shipper permittee.” This is one of a
series of changes that enable out- of- state wineries to legally ship wine directly to
consumers in North Carolina.
( Effective October 1, 2003; SB 668, s. 8, S. L. 03- 402.)
G. S. 105- 113.83( b) – Liability for Payment of Wine Excise Tax: This
subsection was amended to impose liability for the wine excise tax on wine
shipped directly to consumers in North Carolina on the wine shipper permittee.
This is one of a series of changes that enable out- of- state wineries to legally ship
wine directly to consumers in North Carolina.
( Effective October 1, 2003; SB 668, s. 10, S. L. 03- 402.)
G. S. 105- 113.84 – Reporting Requirements: This section was amended to
require wine shipper permittees to file a monthly report of the amount of wine
shipped directly to North Carolina consumers during the month. This is one of a
series of changes that enable out- of- state wineries to legally ship wine directly to
consumers in North Carolina.
( Effective October 1, 2003; SB 668, s. 11, S. L. 03- 402.)
G. S. 105- 113.85 – Repeal of Alcoholic Beverage Tax Discount: This section
was repealed to eliminate the 4% discount previously allowed to wholesalers or
importers who both timely filed the monthly alcoholic beverage tax report and
timely paid the tax due.
( Effective for reporting periods beginning on or after August 1, 2003; HB 397, s.
45A. 2( a), S. L. 03- 284.)
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CORPORATE FRANCHISE TAX
G. S. 105- 122( c)( 1) – Technical Changes: This subdivision was rewritten to
modernize some of the language and to replace the term “ business” with the
term “ apportionable” every time the subdivision referred to “ business income.”
This conforms to the language used in recent court decisions and by the
Department of Revenue on the 2002 corporate income and franchise tax returns
after the definition of “ business income” was amended by the 2002 General
Assembly.
( Effective August 14, 2003; SB 97, s. 5( j), S. L. 03- 416.)
TAX INCENTIVES FOR NEW AND EXPANDING BUSINESSES
Article 3A
G. S. 105- 129.2( 17a) – Definition of Overdue Tax Debt: This section was
amended to add a new subdivision ( 17a) to define overdue tax debt. The
definition is the same as in G. S. 105- 243.1. It is a debt that remains unpaid 90
days after a notice of final assessment is mailed to the taxpayer. The definition
was added along with new G. S. 105- 129.4( b6) to accomplish the goal of not
giving tax credits to taxpayers that are not in compliance with the tax laws.
( Effective for taxable years beginning on or after January 1, 2003; HB 1734, s.
1.5, S. L. 02- 172.)
G. S. 105- 129.3A – Definition of Development Zone Expanded: This section
was amended by adding a new subsection ( d) to define when a parcel of
property that is partially in a development zone is considered to be entirely within
the development zone and, therefore, eligible for the Article 3A enhancements for
development zones. All of the following conditions must be satisfied for the
parcel of property to be considered entirely within the development zone:
( 1) At least fifty percent of the parcel is located within the development zone.
( 2) The parcel was in existence and under common ownership prior to the most
recent federal decennial census.
( 3) The parcel is a portion of land made up of one or more tracts or tax parcels
of land that is surrounded by a continuous perimeter boundary.
( Effective for taxable years beginning on or after January 1, 2003; HB 1734, s.
1.4, S. L. 02- 172.)
G. S. 105- 129.4( a)( 7) – Clarifying Change With Respect to Eligibility for the
Research and Development Credit: This subdivision was added to provide
special rules with respect to determining eligibility for the research and
development credit. If the primary activity of an establishment of the taxpayer in
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this State is computer services, the taxpayer's qualified research expenditures in
this State are considered to be used in computer services. For all other
taxpayers, the taxpayer's qualified research expenditures in this State are
considered to be used in the primary business of the taxpayer.
( This amendment clarifies the intent of the existing law and does not represent a
change in the law. Therefore, the special rule with respect to computer services
is effective for taxable years beginning on or after January 1, 2001, and the
special rule with respect to all other taxpayers is effective for taxable years
beginning on or after January 1, 1996; SB 236, s. 8.1, S. L. 03- 349.)
G. S. 105- 129.4( b) – Wage Standard Changes: Two amendments were made
to this subsection. One of these changes eliminates the wage standard test for
tier one and two areas and for the credit for worker training. Elimination of the
wage standard test for tier one areas also eliminates the test for development
zones, which have the status of a tier one area under G. S. 105- 129.3A for
purposes of the wage standard. As part of this change, the reference to the
credit for substantial investment in other property is deleted. This is because that
credit, in G. S. 105- 129.12A, applies only in an enterprise tier one or two area.
Under prior law, the wage standard for a tier one area or a development zone
was the average weekly wage of the county in which the jobs were located, and
the wage standard for a tier two area was 110% of the average weekly wage of
the county. Elimination of the wage standard test for the lower tier areas
provides an incentive for all jobs created and not just the higher paying jobs.
The wage standard for the worker training credit was eliminated because it was
considered redundant and counter to the goal of the credit. A taxpayer cannot
qualify for the worker training credit unless the taxpayer also qualifies for the jobs
credit or the machinery and equipment credit, both of which have wage standard
requirements. Workers in lower- paying jobs may need more training than those
in higher- paying jobs.
The other change addresses a practical problem of determining the wage
standard that applies to a taxpayer whose taxable year is not a calendar year.
Under the statute, wage standards are determined on a calendar year basis.
The amendment provides that a taxpayer must use the wage standard for the
calendar year in which its taxable year begins.
( Effective for taxable years beginning on or after January 1, 2003; HB 1734, s.
1.3( b), S. L. 02- 172.)
G. S. 105- 129.4( b6) – Overdue Tax Debts: This subsection was added to make
a taxpayer ineligible for an Article 3A tax credit if the taxpayer has an overdue tax
debt at the time the taxpayer claims an installment or carryforward of a credit. An
overdue tax debt is defined in G. S. 105- 243.1( a)( 1) as “[ a] ny part of a tax debt
that remains unpaid 90 days or more after the notice of final assessment was
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mailed to the taxpayer. The term does not include a tax debt, however, if the
taxpayer entered into an installment agreement for the tax debt under G. S. 105-
237 within 90 days after the notice of final assessment was mailed and has not
failed to make any payments due under the installment agreement.”
( Effective for taxable years beginning on or after January 1, 2003; HB 1734, s.
1.2, S. L. 02- 172.)
G. S. 105- 129.9 – Changes to Credit for Investing in Machinery and
Equipment: Two substantive changes were made to this section. Those
changes decrease the credit percentage in some tiers and increase the
investment thresholds for some tiers. Reports on the tax credits show that most
of the tax credit dollars for the credit for machinery and equipment go to
companies in tiers 4 and 5. The changes reduce the machinery and equipment
credits for the higher tiers.
Subsection ( a) was amended to decrease the credit percentage in tiers 3, 4, and
5. Under prior law, a taxpayer was allowed a credit equal to 7% of the excess of
the eligible investment amount over the applicable threshold, regardless of the
tier in which the investment was placed in service. As amended, the credit
percentage remains 7% for tiers 1 and 2 but is decreased to 6% for tier 3, 5% for
tier 4, and 4% for tier 5.
Subsection ( c) was amended to increase the investment thresholds for tiers 4
and 5. For tier 4, the threshold is increased from $ 500,000 to $ 1,000,000. For
tier 5, the threshold is increased from $ 1,000,000 to $ 2,000,000.
( Effective for taxable years beginning on or after January 1, 2003, and apply to
business activities that occur on or after that date except for business activities
subject to a letter of commitment signed before that date; HB 1734, s. 1.1, S. L.
02- 172.)
HISTORIC REHABILITATION TAX CREDITS
Article 3D
G. S. 105- 129.35( a) – Certification Required to Claim Credit for
Rehabilitating an Income- Producing Historic Structure: This subsection was
amended to require a taxpayer, when claiming a credit for rehabilitating an
income- producing historic structure, to provide a copy of the certification obtained
from the State Historic Preservation Officer verifying that the historic structure
has been properly rehabilitated.
( Effective July 15, 2003; HB 397, s. 35A. 1, S. L. 03- 284)
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G. S. 105- 129.35( b) – Sunset of Special Allocation Provisions Extended;
Substantive Changes to Allocation Rules: Two amendments were made to
this subsection. The first amendment extended the sunset for the special
allocation rules applicable to pass- through entities that are eligible for the credit
for rehabilitating an income- producing historic structure from January 1, 2004 to
January 1, 2008. The second amendment made substantive changes to those
special allocation rules. Under prior law, the special allocation provisions
prohibited the allocation of a credit to an owner in excess of the owner’s adjusted
basis in the pass- through entity. As amended, the owner’s basis must be at least
40% of the amount of credit allocated to that owner.
( Extension of sunset effective August 14, 2003; substantive changes effective for
taxable years beginning on or after January 1, 2003; SB 119, ss. 1 and 2, S. L.
03- 415.)
G. S. 105- 129.35( c) – Definitions: There were two amendments to this
subsection. The first amendment added a new subdivision ( 4) to define “ State
Historic Preservation Officer” by cross- reference to G. S. 105- 129.6. The second
change to subsection ( c) amended the definition of “ Pass- through entity” as part
of a series of changes that moved the definition to Article 9 of Chapter 105 and
cross- referenced that definition where appropriate.
( First amendment to subsection ( c) effective July 15, 2003; HB 397, s. 35A. 1,
S. L. 03- 284; second amendment to subsection ( c) effective August 14, 2003; SB
97, s. 4( c), S. L. 03- 416.)
G. S. 105- 129.36( a) – Conforming Change to Credit for Rehabilitating a
Nonincome- Producing Historic Structure: This subsection was amended to
conform to the changes to G. S. 105- 129.35( a) with respect to providing a copy of
the certification when claiming the credit for rehabilitating a nonincome- producing
historic structure.
( Effective July 15, 2003; HB 397, s. 35A. 3, S. L. 03- 284.)
G. S. 105- 129.36( c) – Rule- Making Authority Recodified: This subsection was
recodified as G. S. 105- 129.36A. By moving this provision to G. S. 105- 129.36A,
it also applies to the credit for rehabilitating an income- producing historic
structure. The provision previously applied only to the credit for rehabilitating a
nonincome- producing historic structure.
( Effective July 15, 2003; HB 397, s. 35A. 2, S. L. 03- 284.)
G. S. 105- 129.36A – Rules and Fees With Respect to the Historic
Rehabilitation Tax Credits: This section was enacted to address the rule-making
authority and fees associated with the historic rehabilitation tax credits.
Subsection ( a) provides that the North Carolina Historical Commission, in
consultation with the State Historic Preservation Officer, may adopt rules needed
to administer the certification process. This subsection was previously codified
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as G. S. 105- 129.36( c). Subsection ( b) is a new provision that allows the North
Carolina Historical Commission, in consultation with the State Historic
Preservation Officer, to impose fees for providing certifications of the
rehabilitations. In establishing the amount of the fee, the administrative and
personnel costs incurred by the Department of Cultural Resources shall be
considered. The fee may not exceed 1% of the completed qualifying
rehabilitation expenditures. The proceeds of the fees are receipts of the
Department of Cultural Resources and must be used for performing its duties
under this Article.
( Effective July 15, 2003; HB 397, s. 35A. 2, S. L. 03- 284.)
LOW- INCOME HOUSING TAX CREDITS
Article 3E
G. S. 105- 129.40 – Clarifying and Technical Changes: The title of this section
was renamed as “ Scope and definitions” and subsection ( a) was added to clarify
the effective date of the low- income housing tax credit as amended by the 2002
General Assembly. The existing language of this section was recodified as
subsection ( b) and the definition of “ Pass- through entity” ( G. S. 105- 129.40( b)( 2))
was amended as part of a series of changes that moved the definition to Article 9
of Chapter 105 and cross- referenced that definition where appropriate.
( Effective August 14, 2003; SB 97, s. 3, S. L. 03- 416).
G. S. 105- 129.42( a)( 3) – Technical Change: This subdivision was amended to
correct capitalization errors.
( Effective August 14, 2003; SB 97, s. 6, S. L. 03- 416).
G. S. 105- 129.42( g) – Technical Change: This subsection was amended to
correct a grammatical error.
( Effective August 14, 2003; SB 97, s. 7, S. L. 03- 416).
G. S. 105- 129.42( i) – Clarifying Change: This subsection was amended to
clarify that, when calculating the liability resulting from forfeiture of the low-income
housing credit, the interest, not the interest rate, is determined from the
date the Secretary transferred the credit amount to the Housing Finance Agency.
( Effective August 14, 2003; SB 97, s. 8, S. L. 03- 416).
CORPORATE INCOME TAX
G. S. 105- 130.4( a)( 1) - Technical Change: This subdivision was rewritten to
replace the term “ business” with the term “ apportionable” when referring to
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“ business income.” This conforms to the language used in recent court decisions
and by the Department of Revenue on the 2002 corporate income and franchise
tax returns after the definition of “ business income” was amended by the 2002
General Assembly.
( Effective August 14, 2003; SB 97, s. 5( a), S. L. 03- 416.)
G. S. 105- 130.4( a)( 5) - Technical Changes: This subdivision was rewritten to
replace the term “ business” with the term “ apportionable” when referring to
“ business income” and the term “ nonbusiness” with the term “ nonapportionable”
when referring to “ nonbusiness income.” This conforms to the language used in
recent court decisions and by the Department of Revenue on the 2002 corporate
income and franchise tax returns after the definition of “ business income” was
amended by the 2002 General Assembly.
( Effective August 14, 2003; SB 97, s. 5( b), S. L. 03- 416.)
G. S. 105- 130.4( c) - Technical and Conforming Changes: This subsection was
amended to make a technical change by replacing the term “ nonbusiness” with
the term “ nonapportionable” when referring to “ nonbusiness income.” This
conforms to the language used in recent court decisions and by the Department
of Revenue on the 2002 corporate income and franchise tax returns after the
definition of “ business income” was amended by the 2002 General Assembly.
This subsection was also amended to conform to the repeal of G. S. 105- 130.7 as
part of the changes made to the corporate tax laws so that dividends received by
a corporation from regulated investment companies ( RICs) or real estate
investment trusts ( REITs) are taxable for State income tax purposes to the same
extent as for federal income tax purposes.
( Technical change effective August 14, 2003; SB 97, s. 5( c), S. L. 03- 416;
conforming change effective for taxable years beginning on or after January 1,
2003; SB 236. s. 1.2, S. L. 03- 349.)
G. S. 105- 130.4( f) – Conforming Change: This subsection was amended to
conform to the repeal of G. S. 105- 130.7 as part of the changes made to the
corporate tax laws so that dividends received by a corporation from regulated
investment companies ( RICs) or real estate investment trusts ( REITs) are
taxable for State income tax purposes to the same extent as for federal income
tax purposes.
( Effective for taxable years beginning on or after January 1, 2003; SB 236. s. 1.3,
S. L. 03- 349.)
G. S. 105- 130.4( i) - Technical Change: This subsection was rewritten to replace
the term “ business” with the term “ apportionable” when referring to “ business
income.” This conforms to the language used in recent court decisions and by
the Department of Revenue on the 2002 corporate income and franchise tax
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returns after the definition of “ business income” was amended by the 2002
General Assembly.
( Effective August 14, 2003; SB 97, s. 5( d), S. L. 03- 416.)
G. S. 105- 130.4( j)( 2) - Technical Changes: This subdivision was rewritten to
replace the term “ business” with the term “ apportionable” when referring to
“ business income” and the term “ nonbusiness” with the term “ nonapportionable”
when referring to “ nonbusiness income.” This conforms to the language used in
recent court decisions and by the Department of Revenue on the 2002 corporate
income and franchise tax returns after the definition of “ business income” was
amended by the 2002 General Assembly.
( Effective August 14, 2003; SB 97, s. 5( e), S. L. 03- 416.)
G. S. 105- 130.4( k)( 1) – Technical Change: This subdivision was rewritten to
replace the term �� nonbusiness” with the term “ nonapportionable” when referring
to “ nonbusiness income.” This conforms to the language used in recent court
decisions and by the Department of Revenue on the 2002 corporate income and
franchise tax returns after the definition of “ business income” was amended by
the 2002 General Assembly.
( Effective August 14, 2003; SB 97, s. 5( f), S. L. 03- 416.)
G. S 105- 130.4( l)( 1) – Technical Changes: This subdivision was rewritten to
replace the term “ business” with the term “ apportionable” when referring to
“ business income” and the term “ nonbusiness” with the term “ nonapportionable”
when referring to “ nonbusiness income.” This conforms to the language used in
recent court decisions and by the Department of Revenue on the 2002 corporate
income and franchise tax returns after the definition of “ business income” was
amended by the 2002 General Assembly.
( Effective August 14, 2003; SB 97, s. 5( g), S. L. 03- 416.)
G. S. 105- 130.4( m) through ( s) – Technical Changes: These subsections were
rewritten to modernize some of the language and to replace the term “ business”
with the term “ apportionable” every time the subsections referred to “ business
income.” This conforms to the language used in recent court decisions and by
the Department of Revenue on the 2002 corporate income and franchise tax
returns after the definition of “ business income” was amended by the 2002
General Assembly.
( Effective August 14, 2003; SB 97, s. 5( h), S. L. 03- 416.)
G. S. 105- 130.5( a)( 15) – Additional First- Year Depreciation Add- Back
Extended: This subdivision was amended to extend the requirement to add to
federal taxable income a percentage of the additional first- year depreciation
allowance to the taxable year 2004. The 2002 General Assembly had enacted
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this add- back provision to delay the impact on North Carolina’s budget of the
federal 30% bonus depreciation allowance enacted in 2002. The add- back
percentage was originally set at 100% for taxable year 2002, 70% for taxable
year 2003, and 0% for taxable year 2004 and subsequent years. Federal law
was changed in 2003 to increase the bonus depreciation rate from 30% to 50%.
To delay the impact of this change on the North Carolina budget, the add- back
percentage for the taxable year 2004 was increased from 0% to 70%. The add-back
percentages for all other years remain the same.
( Effective June 30, 2003; HB 397, s. 37A. 3, S. L. 03- 284.)
G. S. 105- 130.5( b)( 3) - RIC and REIT Dividend Deduction Repealed: This
subsection was repealed as part of the changes made to the corporate tax laws
so that dividends received by a corporation from regulated investment companies
( RICs) or real estate investment trusts ( REITs) are taxable for State income tax
purposes to the same extent as for federal income tax purposes. Under prior
law, this subsection provided a deduction from federal taxable income for the
deductible portion of dividends as provided under G. S. 105- 130.7. Under that
statute, a corporation could deduct the proportionate share of dividends received
from RICs and REITs that would not have been subject to North Carolina tax if
received directly by the corporation.
The change has no practical effect on the amount of dividends received from
RICs that are taxed because dividends from RICs are subject to the same
dividend received deduction as dividends from corporations for federal income
tax purposes. However, the amount deducted is now subject to the attribution of
expenses provisions in G. S. 105- 130.5( c)( 3). For dividends received from
REITs, this is a more substantive change in that dividends received from REITs
are not subject to the federal dividends received deduction provisions.
( Effective for taxable years beginning on or after January 1, 2003; SB 236. s. 1.1,
S. L. 03- 349.)
G. S. 105- 130.7 – RIC and REIT Dividend Deduction Repealed: This statute
was repealed as part of the changes made to the corporate tax laws so that
dividends received by a corporation from regulated investment companies ( RICs)
or real estate investment trusts ( REITs) are taxable for State income tax
purposes to the same extent as for federal income tax purposes. Under prior
law, a corporation could deduct the proportionate share of dividends received
from RICs and REITs that would not have been subject to North Carolina tax if
received directly by the corporation.
The change has no practical effect on the amount of dividends received from
RICs that are taxed because dividends from RICs are subject to the same
dividend received deduction as dividends from corporations for federal income
tax purposes. However, the amount deducted is now subject to the attribution of
expenses provisions in G. S. 105- 130.5( c)( 3). For dividends received from
North Carolina Department of Revenue
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REITs, this is a more substantive change in that dividends received from REITs
are not subject to the federal dividends received deduction provisions.
Subsection ( b) of this statute, which provided for the State subsidiary dividend
deduction, was repealed by the 2001 General Assembly to conform North
Carolina’s taxation of dividends received by a corporation from other corporations
to federal law.
( Effective for taxable years beginning on or after January 1, 2003; SB 236. s. 1.1,
S. L. 03- 349.)
G. S. 105- 130.7A( b)( 4) b – Technical Change: This subparagraph was
amended to correct a technical error in the description of one of the
classifications of entities that are considered related entities. The description
listed several entities, including non- corporate entities, and classified them as
related entities if they were component members of the taxpayer. The term
“ component member”, as defined in Internal Revenue Code section 1563( b),
does not include non- corporate members. The component member test is
replaced with a stock ownership test. The entities identified in the subparagraph
are considered related members if they, in the aggregate, own at least 50% of
the value of the taxpayer’s outstanding stock.
( Effective August 14, 2003; SB 97, s. 15, S. L. 03- 416.)
G. S. 105- 130.8( a)( 5) – Technical change: This subdivision was rewritten to
replace the term “ nonbusiness” with the term “ nonapportionable” when referring
to “ nonbusiness income.” This conforms to the language used in recent court
decisions and by the Department of Revenue on the 2002 corporate income and
franchise tax returns after the definition of “ business income” was amended by
the 2002 General Assembly.
( Effective August 14, 2003; SB 97, s. 5( i), S. L. 03- 416.)
G. S. 105- 130.41 – Ports Tax Credit Extended: This section was amended to
extend the sunset for the ports tax credit to taxable years beginning on or after
January 1, 2009. Previously, the credit was scheduled to expire for taxable years
beginning on or after January 1, 2004.
( Effective August 14, 2003; HB 1294, s. 7, S. L. 03- 414.)
INDIVIDUAL INCOME TAX
G. S. 105- 134.2( a): Delay Sunset of Temporary Tax Rate Increase: The
temporary individual income tax rate of 8.25% was scheduled to expire for tax
years beginning on or after January 1, 2004. This subsection was amended to
delay the sunset until January 1, 2006.
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The 8.25% individual income tax rate bracket applies as follows: Married
individuals filing joint returns – 8.25% on taxable income over $ 200,000; Heads
of households – 8.25% on taxable income over $ 160,000; Unmarried individuals
other than surviving spouses and heads of households – 8.25% on taxable
income over $ 120,000; and Married individuals filing separately – 8.25% on
taxable income over $ 100,000.
( Effective for taxable years beginning on or after January 1, 2001, and expires for
taxable years beginning on or after January 1, 2006; HB 397; s. 39.1 and 2, S. L.
03- 284.)
G. S. 105- 134.6( c)( 3) and ( 4) – Elimination of Standard Deduction Marriage
Penalty Takes Effect: The 2001 General Assembly amended these
subdivisions in two phases to eliminate the marriage penalty with respect to the
standard deduction. The 2002 General Assembly postponed the 2001 changes.
The 2001 Legislation eliminated the standard deduction marriage penalty by
increasing the standard deduction for married filers from its current level of
$ 5,000 for married filing jointly to twice the amount allowed single filers and from
its current level of $ 2,500 for married filing separately to the amount allowed
single filers. The standard deduction for single filers is $ 3,000. The increase
was to be phased in over the 2002 and 2003 tax years; however, the 2002
General Assembly postponed the phase- in to tax years 2003 and 2004 as
follows:
Status 2003 2004
Married filing jointly $ 5,500 $ 6,000
Married filing separately $ 2,750 $ 3,000
( Increase originally effective for taxable years beginning on or after January 1,
2002; SB 1005, s. 34.19( a) and ( b), S. L. 01- 424; delay effective September 30,
2002, SB 1115, ss. 30B. 1, 30B. 2, and 30I, S. L. 02- 126.)
G. S. 105- 134.6( c)( 8) – Additional First- Year Depreciation Add- Back
Extended: This subdivision was amended to extend the requirement to add to
federal taxable income a percentage of the additional first- year depreciation
allowance to the taxable year 2004. The 2002 General Assembly had enacted
this add- back provision to delay the impact on North Carolina’s budget of the
federal 30% bonus depreciation allowance enacted in 2002. The add- back
percentage was originally set at 100% for taxable year 2002, 70% for taxable
year 2003, and 0% for taxable year 2004 and subsequent years. Federal law
was changed in 2003 to increase the bonus depreciation rate from 30% to 50%.
To delay the impact of this change on the North Carolina budget, the add- back
percentage for the taxable year 2004 was increased from 0% to 70%. The add-back
percentages for all other years remain the same.
( Effective June 30, 2003; HB 397, s. 37A. 2, S. L. 03- 284.)
North Carolina Department of Revenue
Tax Administration Page 15 2003 Tax Law Changes
G. S. 105- 151.22 – Ports Tax Credit Extended: This credit was amended to
extend the sunset for the ports tax credit to taxable years beginning on or after
January 1, 2009. Previously, the credit was scheduled to expire for taxable years
beginning on or after January 1, 2004.
( Effective August 14, 2003; HB 1294, s. 8, S. L. 03- 414.)
G. S. 105- 151.24 – Two- Step Increase in Credit for Children Takes Effect;
Conforming Change: The 2001 General Assembly amended this section to
make a two- step increase in the tax credit for a dependent child for whom the
taxpayer is allowed to claim a personal exemption. Under the 2001 legislation,
the first step was scheduled to become effective for taxable years beginning on
or after January 1, 2002, and to increase the credit from $ 60 to $ 75. The second
step was scheduled to become effective for taxable years beginning on or after
January 1, 2003, and to increase the credit from $ 75 to $ 100.
The 2002 General Assembly amended the effective dates of the 2001 legislation
to delay the scheduled increases in the credit amounts for tax years 2002 and
2003 to tax years beginning on or after January 1, 2003 and January 1, 2004,
respectively. Therefore, the tax credit is $ 75 for tax year 2003 and $ 100 for
2004.
The 2003 General Assembly amended this section to conform to the age limits
for the credit for children to the federal age limits. The change allows the tax
credit on the North Carolina return only to an individual who was allowed the
credit on the federal return. The federal child tax credit is limited to dependent
children who are under age 17 on the last day of the taxable year. Previously,
the North Carolina child tax credit was allowed for dependent children who were
under 19 on the last day of the tax year or for a student under the age of 24 on
the last day the year.
( Two- step increase originally effective for taxable years beginning on or after
January 1, 2002; SB 1005, s. 34.20 ( a) and ( b), S. L. 01- 424; delay effective
September 30, 2002, SB 1115, ss. 30B. 2.( a), 30B. 2.( b), and 30I, S. L. 02- 126;
conforming change effective for taxable years beginning on or after January 1,
2003; HB 397, s. 39B. 2, S. L. 03- 284.)
G. S. 105- 159.2 – Designation of Tax to North Carolina Public Campaign
Fund: This statute was enacted to permit an individual to agree to allocate $ 3.00
of the individual’s tax liability to the North Carolina Public Campaign Financing
Fund if the individual has an income tax liability of at least that amount. The
North Carolina Public Campaign Financing Fund was established under G. S.
163- 278.63 to provide campaign money to nonpartisan candidates for the North
Carolina Supreme Court and Court of Appeals who voluntarily accept strict
campaign spending and fund- raising limits. On a joint return, each individual may
agree to allocate $ 3.00 to the Fund. Agreeing to allocate $ 3.00 to the Fund
neither increases the tax nor reduces a refund.
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The statute requires the Department to make it clear to taxpayers that the
allocation supports a nonpartisan court system and does not affect their tax
liability or the amount of their refund. The Department must include a specified
statement in the individual income tax instructions and must consult with the
State Board of Elections concerning information given to taxpayers about the
allocation.
The statute makes it clear that a decision to make an allocation to the Fund can
be made only by the taxpayer. It prohibits a paid preparer from marking the
return to make an allocation to the Fund without the consent of the taxpayer. It
also prohibits software packages used to produce North Carolina returns from
defaulting to an agreement or an objection.
( Effective for taxable years beginning on or after January 1, 2003; SB 1054, s. 4,
S. L. 02- 158.)
TAX CREDITS FOR QUALIFIED BUSINESS INVESTMENTS
G. S. 105- 163.010 – New Definitions Provided: This section was amended to
add the following new definitions for ( a) granting entity, ( b) qualified business,
and ( c) qualified licensee business.
( 5a) Granting Entity - A granting entity is any of the following: ( 1) a tax
exempt corporation whose principal purpose is stimulation of the
development of the biotechnology industry and who has received State
appropriations, ( 2) a tax exempt entity that is a private foundation whose
principal purpose is conducting research and development in certain high
technology fields or investing in companies that provide research and
development in certain high technology fields, or ( 3) an institute that is
administratively located within the UNC University system, is financed by a
tax exempt corporation, whose principal purpose is the stimulation of
economic development, and who funds other small businesses engaged
in developing technology.
( 7b) Qualified Business - A qualified business venture, a qualified grantee
business, or a qualified licensee business.
( 9a) Qualified Licensee Business - A qualified licensee business is a
business that is registered with the Securities Division of the Department
of the Secretary of State, has no more than $ 1,000,000 in gross revenues
annually, and is performing under a licensing agreement with a UNC
system institution or a doctoral research university for the purpose of
commercializing technology developed at the institution or university.
( Effective January 1, 2004; HB 1294, s. 2, S. L. 03- 414.)
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G. S. 105- 163.010( 7) – Definition of Pass- through Entity Revised: This
subsection was amended to cross– reference G. S. 105- 228.90. which now
provides the definition of a pass- through entity.
( Effective August 14, 2003; SB 97, s. 4.( a), S. L. 03- 416.)
G. S. 105- 163.010( 9) – Definition of Qualified Grantee Business Revised:
The definition of a qualified grantee business was expanded to include
businesses that receive grants or investments from “ granting entities”, which is
defined in subsection ( 5a).
( Effective January 1, 2004; HB 1294, s. 2, S. L. 03- 414.)
G. S. 105- 163.013( b1) – Investments Allowed in Qualified Licensee
Businesses: This subsection was added to provide a third category of qualified
businesses. Under previous law, only investments in qualified business ventures
and qualified grantee businesses qualified for the tax credit. Investments in
qualified licensee businesses, defined in subsection ( 9a), now qualify for the tax
credit.
( Effective for investments made on or after January 1, 2004; HB 1294, s. 5, S. L.
03- 414.)
G. S. 163.015 - Sunset Extended: The credit for qualified business investments
was scheduled to sunset for investments made on or after January 1, 2004. The
credit now sunsets for investments made on or after January 1, 2007.
( Effective for taxable years beginning on or after January 1, 2004; HB 1294, s, 1,
S. L. 03- 414.)
WITHHOLDING TAX
G. S. 105- 163.1( 9) – Definition of Pass- through Entity Revised: This
subsection was amended to cross– reference G. S. 105- 228.90. which now provides the
definition of a pass- through entity.
( Effective August 14, 2003; SB 97, s. 4( b), S. L. 03- 416.)
SALES AND USE TAX
G. S. 105- 164.3 – Definition Changes: Some definitions were revised, some
were recodified, and some are new. The changes are as follows and become
effective as noted after each definition:
Computer – ( 4a). This definition was added by the 2003 legislation bringing
North Carolina law closer to the standards that must be met to comply with the
national Streamlined Sales Tax Agreement. The term is defined as “ an
North Carolina Department of Revenue
Tax Administration Page 18 2003 Tax Law Changes
electronic device that accepts information in digital or similar form and
manipulates it for a result based on a sequence of instructions.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Computer software – ( 4b). This definition was added by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. The term is defined as “ a
set of coded instructions designed to cause a computer or automatic data
processing equipment to perform a task.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Custom computer software – ( 5c). This definition was rewritten and recodified
by the 2003 legislation bringing North Carolina law closer to the standards that
must be met to comply with the national Streamlined Sales Tax Agreement. The
term was previously defined within the statutory exemption for custom computer
software. The term is defined as “ computer software that is not prewritten
computer software.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Delivered electronically – ( 5d). This definition was added by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. The term is defined as
“ delivered to the purchaser by means other than tangible storage media.” North
Carolina does not tax property delivered electronically.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Direct mail – ( 7a). This definition was added by the 2003 legislation bringing
North Carolina law closer to the standards that must be met to comply with the
national Streamlined Sales Tax Agreement. Direct mail is defined, in part, as
“ printed material delivered or distributed by the United States Postal Service or
other delivery service to a mass audience….” Special provisions regarding the
sourcing of direct mail and use of a direct pay permit by purchasers of direct mail
were also added.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Drug – ( 8a). This definition was added by the 2003 legislation bringing North
Carolina law closer to the standards that must be met to comply with the national
Streamlined Sales Tax Agreement. North Carolina law previously defined
“ prescription drug”; this legislation defines “ prescription” and “ drug” separately.
The change does not represent a substantive change in the law.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
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Tax Administration Page 19 2003 Tax Law Changes
Durable medical equipment – ( 8b). This definition was added by the 2003
legislation bringing North Carolina law closer to the standards that must be met
to comply with the national Streamlined Sales Tax Agreement. Durable medical
equipment was included in the exemption for medical products ( G. S. 105-
164.13( 12) under prior law; however, the term was not defined. The term
includes items that serve a medical purpose, can withstand repeated use, and
are not worn on the body.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Durable medical supplies – ( 8c). This definition was added by the 2003
legislation bringing North Carolina law closer to the standards that must be met
to comply with the national Streamlined Sales Tax Agreement. Durable medical
supplies were included in the exemption for medical products under prior law;
however, the term was not defined. Durable medical supplies are “ supplies
related to use with durable medical equipment that are eligible to be covered
under the Medicare or Medicaid program.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Electronic – ( 8d). This definition was added by the 2003 legislation bringing
North Carolina law closer to the standards that must be met to comply with the
national Streamlined Sales Tax Agreement. The term is defined as “ relating to
technology having electrical, digital, magnetic, wireless, optical, electromagnetic,
or similar capabilities.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Engaged in business – ( 9). This definition was amended to provide that the term
includes the direct shipment of wine to a purchaser in the State by a wine shipper
permittee under G. S. 18B- 1001.1.
( Effective October 1, 2003; SB 668, s. 12, S. L. 03- 402.)
Lease or rental – ( 17). This definition was rewritten by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. There was no substantive
change in the law. Sourcing principles were added for periodic rental payments.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Load and leave – ( 17a). This definition was added by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. The term is defined as
" delivery to the purchaser by use of a tangible storage media where the tangible
storage media is not physically transferred to the purchaser.” North Carolina
does not tax property delivered by load and leave.
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Tax Administration Page 20 2003 Tax Law Changes
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Manufactured home – ( 20). This definition was rewritten to delete the reference
to specifications for modular homes. There is now a separate definition for
“ modular home.”
( Effective January 1, 2004 for sales made on and after that date; HB 1006, s. 13,
S. L. 03- 400.)
Mobility enhancing equipment – ( 21a). This definition was added by the 2003
legislation bringing North Carolina law closer to the standards that must be met
to comply with the national Streamlined Sales Tax Agreement. The term
includes equipment that is primarily and customarily used to provide or increase
the ability of an individual to move from one place to another.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Modular home – ( 21a). This definition was added as a result of the levy of a
2 ½ % State sales and use tax under G. S. 105- 164.4( a)( 8) on modular homes. A
modular home is a factory- built structure that is designed to be used as a
dwelling, is manufactured in accordance with the specifications for modular
homes under the North Carolina Residential Building Code, and bears a seal or
label issued by the Department of Insurance pursuant to G. S. 143- 139.1.
( Effective January 1, 2004 for sales made on and after that date; HB 1006, s. 14,
S. L. 03- 400.)
* Note: The definitions for mobility enhancing equipment and modular home were
both enacted as subdivision ( 21a). One of the definitions will have to be
recodified.
Modular homebuilder – ( 21b). This definition was added as a result of the levy of
a 2 ½ % State sales and use tax under G. S. 105- 164.4( a)( 8) on modular homes.
The term is defined as “ a person who furnishes for consideration a modular
home to a purchaser that will occupy the modular home. The purchaser can be a
person that will lease or rent the unit as real property.” As a result, the tax will be
collected by the manufacturer or other seller when he sells the modular home to
a dealer or homeowner. The sale by a dealer to the individual purchasing the
home will not be subject to tax.
( Effective January 1, 2004 for sales made on and after that date; HB 1006, s. 14,
S. L. 03- 400.)
Over- the- counter drug – ( 25a). This definition was added by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. The term is defined as “ a
drug that can be dispensed under federal law without a prescription and is
North Carolina Department of Revenue
Tax Administration Page 21 2003 Tax Law Changes
required by 21 C. F. R. § 210.66 to have a label containing a ‘ Drug Facts’ panel
and a statement of its active ingredients.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Prepared food – ( 28). This definition was rewritten by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. Prepared food will continue
to be subject to the combined State and county tax, and as a result of the revised
definition and a change in the exemption of food from the State tax, some items
are taxable that were exempt under prior law.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Prescription – ( 29). This definition was added by the 2003 legislation bringing
North Carolina law closer to the standards that must be met to comply with the
national Streamlined Sales Tax Agreement. The term is defined as “ an order,
formula, or recipe issued orally, in writing, electronically, or by another means of
transmission by a physician, dentist, veterinarian, or another person licensed to
prescribe drugs.” North Carolina law previously defined “ prescription drug”; this
legislation defines “ prescription” and “ drug” separately. There is no substantive
change in the law.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Prewritten computer software – ( 29a). This definition was added by the 2003
legislation bringing North Carolina law closer to the standards that must be met
to comply with the national Streamlined Sales Tax Agreement. The term is
defined as “ computer software, including prewritten upgrades, that is not
designed and developed by the author or another creator to the specifications of
a specific purchaser. The term includes software designed and developed by the
author or another creator to the specifications of a specific purchaser when it is
sold to a person other than the specific purchaser.”
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Prosthetic device – ( 30a). This definition was added by the 2003 legislation
bringing North Carolina law closer to the standards that must be met to comply
with the national Streamlined Sales Tax Agreement. The term includes a device
that artificially replaces a missing portion of the body, prevents or corrects a
physical deformity or malfunction, or supports a weak or deformed portion of the
body.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
Tangible personal property – ( 46). This definition was amended by the 2003
legislation bringing North Carolina law closer to the standards that must be met
to comply with the national Streamlined Sales Tax Agreement. Electricity, water,
North Carolina Department of Revenue
Tax Administration Page 22 2003 Tax Law Changes
gas, steam, and prewritten computer software are specifically set out as items
included in the term.
( Effective July 15, 2003; HB 397, s. 45.2, S. L. 03- 284.)
G. S. 105- 164.4( a) – Maintain State Sales Tax Rate: The additional ½ % State
sales and use tax was extended. The tax was originally scheduled to be
repealed for sales made on or after July 1, 2003. The ½ % State tax is repealed
for sales made on and after July 1, 2005.
( Effective July 1, 2003; HB 397, s. 38.1, S. L. 03- 284.)
G. S. 105- 164.4( a)( 8) – Tax on Modular Homes: This new subdivision levies a
2 ½ % State tax on the sales price of a modular home, including accessories
attached when delivered to the purchaser. The retail sale is the sale of the
modular home to a modular homebuilder, who is defined as the person selling
the home to the purchaser who will be occupying the home. The effect of this
provision is that the manufacturer or other seller will be liable for collecting the
tax on the sale to the modular home “ dealer.” The sale of the home by the dealer
to the home owner/ occupant will not be taxable.
( Effective January 1, 2004 for sales made on and after that date; HB 1006, s. 15,
S. L. 03- 400.)
G. S. 105- 164.4B – Change in Sourcing Rules: This section was rewritten to
bring North Carolina law closer to the standards that must be met in order for the
State to comply with the national Streamlined Sales Tax Agreement. The statute
sets out sourcing principles for periodic rental payments for leases or rentals of
specific categories of tangible personal property; it also defines “ transportation
equipment.” There are special provisions for sourcing of direct mail. The
principles apply to both State and local taxes, if applicable.
( Effective July 15, 2003; HB 397, s. 45.3, S. L. 03- 284.)
G. S. 105- 164.4C( f) – Call Center Cap: A technical correction was made to
delete an obsolete reference to interstate service.
( Effective August 14, 2003; SB 97, s. 16( a), S. L. 03- 416.)
G. S. 105- 164.6( f) – Use Tax Collection: A statement was added to clarify that a
retailer required to obtain a certificate of registration is required to pay the use tax
levied under G. S. 105- 164.6.
( Effective August 14, 2003; SB 97, s. 17, S. L. 03- 416.)
G. S. 105- 164.6A( b) – Voluntary Collection of Use Tax: This subsection was
rewritten to provide that the collection period for sellers voluntarily collecting use
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Tax Administration Page 23 2003 Tax Law Changes
tax cannot be more often than annually if the seller’s State and local tax
collections are less than one thousand dollars ($ 1,000) in a calendar year.
( Effective July 15, 2003; HB 397, s. 45.4, S. L. 03- 284.)
G. S. 105- 164.8( b) – Mail Order Sales: A new subdivision ( 8) was added to
include a retailer that is a holder of a wine shipper permit issued by the ABC
Commission pursuant to G. S. 18B- 1001.1 as a retailer engaged in business in
this State for the purpose of making mail order sales. A retailer holding a wine
shipper permit is required to collect sales or use tax on its retail sales of wine to
purchasers in the State.
( Effective October 1, 2003; SB 668, s. 13, S. L. 03- 402.)
G. S. 105- 164.13 – Exemptions and Exclusions: A technical correction was
made to the introductory language to this section to add the term “ services.” This
clarifies that exemptions and exclusions apply to both tangible personal property
and services on which tax is imposed.
( Effective August 14, 2003; SB 97, s. 18( a), S. L. 03- 416.)
The 2003 General Assembly added several new subdivisions to this section and
amended some of the existing subdivisions. The changes and their effective
dates are as follows:
Manufactured Products – ( 5). A technical change was made to update a
statutory reference to the definition of “ wholesale merchant.”
( Effective August 14, 2003; SB 97, s. 21, S. L. 03- 416.)
Medical Equipment – ( 12). This exemption was rewritten to bring North Carolina
law closer to standards that must be met in order for the State to comply with the
national Streamlined Sales Tax Agreement. The exemption applies to sales of
prosthetic devices, mobility enhancing equipment sold on prescription, durable
medical equipment sold on prescription, and durable medical supplies sold on
prescription. The application of tax for most items remains the same as under
prior law. However, some articles that were exempt under prior law regardless of
to whom they were sold will now only be exempt when sold on prescription. An
example of this is a wheelchair, which is now considered mobility enhancing
equipment and is exempt only when sold on prescription.
( Effective July 15, 2003; HB 397, s. 45.5, S. L. 03- 284.)
Drugs – ( 13). This exemption was rewritten to bring North Carolina closer to the
standards that must be met in order for the State to comply with the national
Streamlined Sales Tax Agreement. The exemption applies to drugs required by
federal law to be dispensed only on prescription, over- the- counter drugs sold on
North Carolina Department of Revenue
Tax Administration Page 24 2003 Tax Law Changes
prescription, and insulin. There is no substantive change in the application of tax
for these items.
( Effective July 15, 2003; HB 397, s. 45.5, S. L. 03- 284.)
Worthless Accounts – ( 15). This exemption was amended to clarify that
municipalities that sell electricity are entitled to the deduction for worthless
accounts provided all the conditions for charge- off that would apply if the
municipality were subject to income tax were met.
( Effective July 27, 2003; SB 236, s. 11, S. L. 03- 349.)
Custom Computer Software – ( 43). This exemption was rewritten. Custom
computer software and the portion of prewritten computer software that is
modified or enhanced if the modification or enhancement is designed and
developed to the specifications of a specific purchaser and the charges for the
modification or enhancement are separately stated are exempt from tax. Prior to
this change, prewritten software that was modified or enhanced based on the
specifications of a specific customer was considered custom computer software
and the total charge was exempt from the tax. The canned or prewritten portion
of software is not exempt as a result of customized modification or enhancement.
( Effective July 15, 2003; HB 397, s. 45.5, S. L. 03- 284.)
Computer Software Delivered Electronically – ( 43a). This exemption was added
to provide an exemption for computer software delivered electronically and by
load and leave. Under prior law, computer software delivered electronically was
not taxed since it was not considered to constitute tangible personal property.
( Effective July 15, 2003; H. B. 397, s. 45.5, S. L. 03- 284.)
Vending Items - ( 50). This exemption was rewritten. Until January 1, 2004, fifty
percent ( 50%) of the sales price of tangible personal property sold through
vending machines except for closed container soft drinks and tobacco products is
taxable; one hundred percent ( 100%) of the sales price of tobacco products and
closed container soft drinks is taxable. Effective January 1, 2004, the partial
exemption will include closed container soft drinks; therefore, only fifty percent
( 50%) of the sales price of closed container soft drinks sold through vending
machines will be taxable.
( Effective January 1, 2004; HB 397, s. 45.5A, S. L. 03- 284.)
Water Delivered Through Main Lines or Pipes - ( 51). This exemption was added;
formerly water delivered through main lines or pipes was excluded from tax
under the definition of tangible personal property. Water delivered in this manner
continues to be exempt.
( Effective July 15, 2003; HB 397, s. 45.5, S. L. 03- 284.)
North Carolina Department of Revenue
Tax Administration Page 25 2003 Tax Law Changes
State Agencies - ( 52). This new exemption provides that items subject to sales
tax under G. S. 105- 164.4, excluding electricity and telecommunications service,
sold to State agencies are not subject to tax at the time of purchase. The
exemption is effective for sales made on or after July 1, 2004. State agencies
will be required to secure an exemption number from the Department and
provide the number to vendors in order to exempt a sale from tax. The
exemption does not apply to purchases made by contractors in connection with
performance contracts entered into with State agencies.
( Effective July 1, 2004; SB 100, s. 1, S. L. 03- 431.)
G. S. 105- 164.13B – Basis for Exempting Food: This section was rewritten and
changes the basis for exempting food from State sales or use tax. With the
exception of candy, the exemption no longer references items for home
consumption and items eligible under the Federal Food Stamp Program. The
following items are subject to State and local tax: alcoholic beverages, tobacco
products, candy ( unless purchased for home consumption and exempt if
purchased under the food stamp program), soft drinks, prepared food, dietary
supplements, and food sold through vending machines.
( Effective July 15, 2003; HB 397, s. 45.6, S. L. 03- 284.)
Subdivision ( a)( 6) is repealed effective January 1, 2004. As a result, all candy
will be exempt from the State tax and subject to only the 2% local tax.
( Effective January 1, 2004; HB 397, s. 45.6B, S. L. 03- 284.)
G. S. 105- 164.13B( b) – Administration of Food Tax: This subsection was
added to provide that the local sales and use tax on food is to be administered as
if it were imposed as a State sales and use tax.
( Effective October 1, 2003; HB 397, s. 45.6A, S. L. 03- 284.)
G. S. 105- 164.13C – Sales Tax Holiday: This section was rewritten to delete
printers, printer supplies, and educational software from the list of items that
qualify for the exemption during the sales tax holiday. Computers with a sales
price of three thousand five hundred dollars ($ 3,500) or less per item will
continue to be exempt during the holiday. Sales involving layaway contracts and
similar deferred payment and delivery transactions will no longer be excluded
from the exemption. School supplies with a sales price of one hundred dollars
($ 100) or less per item will continue to be exempt.
( Effective October 1, 2003; HB 397, 45.7, S. L. 03- 284.)
G. S. 105- 164.14( b) – Refunds to Nonprofit Entities and Hospital Drugs: This
subsection was amended to clarify that refunds of sales and use taxes are
North Carolina Department of Revenue
Tax Administration Page 26 2003 Tax Law Changes
authorized for purchases of taxable services, other than electricity and
telecommunications service. There was no substantive change in the law.
( Effective August 14, 2003; SB 97, s. 18( b), S. L. 03- 416.)
G. S. 105- 164.14( c) – Refunds to Governmental Agencies: This subsection
was amended to clarify that refunds of sales and use taxes are authorized for
purchases of taxable services, other than electricity and telecommunications
service. There was no substantive change in the law.
( Effective August 14, 2003; SB 97, s. 18( c), S. L. 03- 416.)
G. S. 105- 164.14( c) – Refunds to Joint Purchasing Agencies of Local School
Administrative Units: This subsection was rewritten to add a new entity to the
list of governmental agencies eligible for a refund of sales and use tax. New
subdivision ( 2c) provides that a joint agency created by interlocal agreement
among local school administrative units to jointly purchase food service- related
materials, supplies, and equipment on their behalf is eligible for refunds.
( Effective for taxes paid on or after July 1, 2003; SB 100, s. 2, S. L. 03- 431.)
Subdivision ( 20) was rewritten to clarify that the refund provision applies to
services eligible for refund as well as tangible personal property.
( Effective August 14, 2003; SB 97, s. 18( d), S. L. 03- 416.)
Subdivision ( 21) was rewritten to reflect a change in the name of the
governmental entity from the University of North Carolina Hospitals at Chapel Hill
to the University of North Carolina Health Care System.
( Effective August 14, 2003; SB 97, s. 23, S. L. 03- 416.)
G. S. 105- 164.14( e) – Refunds of Local Tax to State Agencies: This
subsection was amended to clarify that refunds of sales and use taxes are
authorized for purchases of taxable services, other than electricity and
telecommunications service. There was no substantive change in the law.
( Effective August 14, 2003; SB 97, s. 18( e), S. L. 03- 416.)
This subsection was further amended to remove direct purchases of tangible
personal property as items eligible for refund since State agencies will be exempt
from tax on these purchases as of July 1, 2004.
( Effective July 1, 2004, SB 100, s. 3, S. L. 03- 431.)
G. S. 105- 164.16( b1) – Due Date for Monthly Returns: This subsection was
rewritten to change the due date for monthly sales and use tax returns from the
15th of the month following the calendar month covered by the return to the 20th
of the month. This change brings North Carolina law closer to the standards that
must be met in order for the State to comply with the national Streamlined Sales
North Carolina Department of Revenue
Tax Administration Page 27 2003 Tax Law Changes
Tax Agreement. A return for the month of October 2003 will be the first return
affected by the change in due date.
( Effective October 1, 2003; HB 397, s. 45.8, S. L. 03- 284.)
G. S. 105- 164.27A( a) – Direct Pay Permit for Direct Mail: This subsection was
rewritten to allow purchasers of direct mail to apply to the Secretary of Revenue
for a direct pay permit. A qualifying purchaser is authorized to make purchases
of direct mail without payment of sales or use tax to the vendor. The permit may
only be used to purchase direct mail. The purchaser will be liable for remitting
use tax on the taxable portion of printed material used in North Carolina.
( Effective July 15, 2003; HB 397, s. 45.9, S. L. 03- 284.)
G. S. 105- 164.27A( b) – Direct Pay Permit for Telecommunications: This
subsection was amended to remove an obsolete reference to interstate
telecommunications.
( Effective August 14, 2003; SB 97, s. 16( b), S. L. 03- 416.)
G. S. 105- 164.29A – State Government Exemption Process: This section was
added to provide the process by which State agencies must obtain an exemption
number from the Department in order to be able to purchase items without
payment of sales and use tax.
( Effective January 1, 2004; SB 100, s. 4, S. L. 03- 431.)
G. S. 105- 164.44G – Distribution to Counties: This new section was added
and sets out the distribution made to counties of 20% of the taxes collected on
the sales of modular homes. The amount will be included with local tax revenue
not attributable to a particular county and will be distributed monthly in the same
manner as the third one- half cent local tax.
( Effective January 1, 2004; HB 1006, s. 16, S. L. 03- 400.)
G. S. 105- 187.18 – Scrap Tire Disposal Tax: A technical correction was added
to clarify that the scrap tire disposal tax is not applicable to sales that a state
cannot constitutionally tax.
( Effective August 14, 2003; SB 97, s. 19( a), S. L. 03- 416.)
G. S. 105- 187.23 – White Goods Disposal Tax: A technical correction was
added to clarify that the white goods disposal tax is not applicable to sales that a
state cannot constitutionally tax.
( Effective August 14, 2003; SB 97, s. 19( b), S. L. 03- 416.)
North Carolina Department of Revenue
Tax Administration Page 28 2003 Tax Law Changes
G. S. 105- 187.33 – Dry- Cleaning Solvent Tax: A technical correction was
added to clarify that the dry- cleaning solvent tax is not applicable to sales that a
state cannot constitutionally tax.
( Effective August 14, 2003, SB 97, s. 19( c), S. L. 03- 416.)
G. S. 105- 466( c) – Advance Notice of New Tax or Rate Change: This
subsection was amended to bring North Carolina law closer to the standards that
must be met to comply with the national Streamlined Sales Tax Agreement. A
provision was added to make the applicability of a new tax or tax rate change to
purchases made from printed catalogs effective on the first day of a calendar
quarter after a minimum of 120 days from the date the Secretary notifies the
seller of the new tax or tax rate change.
( Effective July 15, 2003; HB 397, s. 45.10, S. L. 03- 284.)
G. S. 105- 469 – Collection and Administration of Tax on Food: This section
was rewritten to provide that the 2% local tax on food is to be administered as if it
were a State tax. A specific method of allocating the tax on food to local
government is set out.
( Effective October 1, 2003; HB 397, s. 45.11( a), S. L. 03- 284; and SB 97, s.
27( a), S. L. 03- 416.)
G. S. 105- 472( a) – Local Sales Tax Distribution: This subsection was
amended to provide that amounts collected by electronic funds transfer
payments are included in the distribution for the month in which the return that
applies to the payment is received.
( Effective July 1, 2003; SB 236, s. 5, S. L. 03- 349.)
G. S. 105- 521 – Hold Harmless Distribution: The date for which the hold
harmless distribution made pursuant to Article 44 must be made to applicable
local governments was changed from September 15 to August 15 of the year.
The distribution is intended to be extended through 2012.
( Effective July 1, 2003; HB 397, s. 37.1, S. L. 03- 284.)
INSURANCE PREMIUMS TAX
G. S. 58- 6- 25 – Insurance Regulatory Charge; Conforming Change: The
percentage rate to be used in calculating the insurance regulatory charge under
this statute is 5% for the 2003 calendar year. This charge is a percentage of
gross premiums tax liability. Subsections ( a) and ( e) were amended to conform
to changes in G. S. 105- 228.5 that subject Article 65 corporations to the same
rate of tax as other insurance contracts.
North Carolina Department of Revenue
Tax Administration Page 29 2003 Tax Law Changes
( 2003 regulatory rate effective June 30, 2003; HB 397, s. 33.1( a), S. L. 03- 284;
conforming change effective for taxable years beginning on or after January 1,
2004 and repealed for taxable years beginning on or after the January 1
immediately following the date the Commissioner of Insurance certifies to the
Department of Revenue that there are no remaining Article 65 corporations
offering medical service plans or hospital service plans; HB 397, s. 43.2, S. L. 03-
284.)
G. S. 105- 228.5 – Tax Scope, Rate, and Technical Changes: The 2001
General Assembly made numerous changes to this section that affect tax years
2002, 2003, and 2004. The section was amended several times to adjust its
scope and rate. The first act that amended this section made health
maintenance organizations ( HMOs) subject to a gross premiums tax at the rate
of 0.833% and increased the rate for Article 65 corporations from 0.5% to
0.833%. Both of these changes were to be effective for tax year 2002. In
addition to these changes, the first act that amended this section increased the
rate for both HMOs and Article 65 corporations to 1% effective for the 2003 tax
year.
The changes made by the first act were undone by subsequent acts. The
subsequent acts delayed the effective date of the application of the tax to HMOs
and of the tax increase to Article 65 corporations until tax year 2003. Under
these acts, the tax rate for both HMOs and Article 65 Corporations is 1.1%
effective for the 2003 tax year. The rate decreases to 1% for tax years beginning
on or after January 1, 2004.
The 2003 General Assembly further revised the scope and rate of tax with
respect to Article 65 corporations. Effective for taxable years beginning on or
after January 1, 2004, gross collections from membership dues received by
Article 65 corporations are subject to the same tax rate as other insurance
contracts. Therefore, the tax rate for Article 65 corporations increases from 1.1%
to 1.9% for 2004 instead of decreasing to 1%.
Subsection ( f) of this section requires taxpayers to prepay their tax liability in
three installments. Special rules apply to HMOs for the tax year 2003 and to
Article 65 corporations for the tax year 2003, 2004, and 2005. HMOs must
prepay their 2003 tax liability and Article 65 corporations must prepay their 2003,
2004, and 2005 tax liability in two installments, rather than three. One- half of the
estimated liability is due with each installment. The installments are due on April
15 and June 15, 2003. An underpayment of estimated tax accrues interest. The
penalties in Article 9 of Chapter 105 apply to these estimated tax payments.
( HMOs subject to tax originally effective January 1, 2002; SB 1005, s. 34.22, S. L.
01- 424; revision to the effective date, the establishment of the 1.1% tax rate, and
the exception to the provisions of G. S. 105- 228.5( f) effective for tax year 2003;
decrease in the 1.1% rate to 1% effective for tax years beginning on or after
January 1, 2004; HB 748, s. 2, S. L. 01- 489; increase in tax rate for Article 65
North Carolina Department of Revenue
Tax Administration Page 30 2003 Tax Law Changes
corporations effective for taxable years beginning on or after January 1, 2004
and repealed for taxable years beginning on or after the January 1 immediately
following the date the Commissioner of Insurance certifies to the Department of
Revenue that there are no remaining Article 65 corporations offering medical
service plans or hospital service plans; HB 397, s. 43.2, S. L. 03- 284.)
GENERAL ADMINISTRATION
G. S. 105- 228.90( b)( 1b) – Reference to the Internal Revenue Code Updated:
This subdivision was amended twice during the 2003 session. The first
amendment updated the reference to the Internal Revenue Code from May 1,
2002 to January 1, 2003. Any amendments to the Internal Revenue Code
enacted in 2002 that increase North Carolina taxable income for the 2002 taxable
year become effective for taxable years beginning on or after January 1, 2003.
This amendment conforms North Carolina tax law to the tax provisions of the
federal Clergy Housing Allowance Clarification Act of 2002, P. L. 107- 181,
enacted on May 20, 2002, which clarified the amount that may be excluded from
gross income by a minister for a rental allowance received as part of the
minister’s compensation.
The second amendment updated the reference to the Code from January 1,
2003 to June 1, 2003. This implies that North Carolina has conformed to all of
the provisions of the federal Jobs and Growth Tax Relief Reconciliation Act of
2003, enacted on May 28, 2003, which included increased expensing for small
businesses under Code section 179 and changes to bonus depreciation that
increase the rate. However, existing provisions in G. S. 105- 130.5( a) and G. S.
105- 134.6( c) and amendments to those provisions result in the State not
immediately conforming with the increased bonus depreciation allowance.
( First amendment effective April 24, 2003; HB 320, ss. 1 and 2, S. L. 03- 25;
second amendment effective June 30, 2003; HB 397, s. 37A. 1, S. L. 03- 284.)
G. S. 105- 228.90( b)( 4d) – Pass- Through Entity Defined: This subdivision was
amended to include the definition for a pass- through entity. Previously, the
definition for a pass- through entity was codified in G. S. 105- 163.010( 7). A pass-through
entity is an entity or business, including a limited partnership, a general
partnership, a joint venture, a Subchapter S Corporation, or a limited liability
company, all of which is treated as owned by individuals or other entities under
the federal tax laws, in which the owners report their share of the income, losses,
and credits from the entity or business on their State income tax returns. This
change is part of a series of changes that consolidated the definition of a pass-through
entity in one statute and cross- referenced that definition in other statutes.
( Effective August 14, 2003; SB 97, s. 4( d), S. L. 03- 416.)
North Carolina Department of Revenue
Tax Administration Page 31 2003 Tax Law Changes
G. S. 105- 242( a)( 2) – Avoid Duplicative Reporting of Sales of Seized
Property: This subdivision was amended to no longer require the Department of
Revenue to file a report of seized property with the clerk of superior court as long
as the sale is otherwise publicly reported.
The Department is authorized to collect delinquent taxes through the levy upon
and sale of the taxpayer’s real or personal property. The Department may either
direct the sheriff to levy upon and sell property or it may levy upon the property
itself. When the Department levies upon personal property without the use of the
sheriff, the actual sale of the property is conducted by the Department of
Administration’s State Surplus Property section. The State Surplus Property
section posts information related to bids and sales of seized property both online
and in writing. Since the Department of Administration makes a report of the
seized property sold through surplus property sales, the Department of Revenue
will not have to file a report of sale with the clerk of superior court as required
under G. S. 1- 339.63.
( Effective July 27, 2003; SB 236, s. 2, S. L. 03- 349.)
G. S. 105- 243.1( b) – Outsourcing: This subsection was amended to extend the
Department’s authority to outsource the collection of in- state tax debts to October
1, 2005. Previously, the authority to outsource collection of in- state tax debts
was scheduled to expire October 1, 2003.
( Effective July 27, 2003; SB 236, s. 3, S. L. 03- 349.)
G. S. 105- 259( b)( 7) – Conforming Change: This statute was amended to allow
the Department to exchange tax information with the law enforcement officers of
the Department of Crime Control and Public Safety. This change was made
necessary with the reorganization of the Department of Transportation, Division
of Motor Vehicles section.
( Effective July 27, 2003; SB 236; s. , S. L. 2003- 349.)
G. S. 105- 269.6 – Candidates Financing Fund Election Repealed: This statute
allowed an individual to contribute all or part of the individual’s income tax refund
to the North Carolina Candidates Financing Fund. The statute was repealed,
effective for the 2003 tax year. Few taxpayers contributed to the Fund and the
revenue in the Fund was ever disbursed to candidates because they either did
not meet the qualifications for receipt of the funds or did not apply for the funds.
The General Assembly repealed this statute as part of the legislation establishing
nonpartisan judicial elections and a method for providing an alternative means of
financing campaigns of candidates for the North Carolina Supreme Court or
Court of Appeals who accept fundraising and spending limits. A new fund is
established in Article 22D of Chapter 163 of the General Statutes, called the
North Carolina Department of Revenue
Tax Administration Page 32 2003 Tax Law Changes
North Carolina Public Campaign Financing Fund. A new individual income tax
check- off will appear on the 2003 income tax return for that Fund.
( Effective for taxable years beginning on or after January 1, 2003; SB 1054, s.
6( a), S. L. 02- 126.)
G. S. 105- 269.14 – Use Tax Line on the Individual Income Tax Return: The
statute was amended to extend the inclusion of a line on the individual income
tax return to report use tax on non- business purchases through the 2004 tax
year.
( Effective June 30, 2003; HB 397, s. 44.1, S. L. 03- 284.)
PROPERTY TAX
G. S. 105- 273( 13) Definition of Real Property: This amendment changes the
definition of real property to include a manufactured home on land in which the
owner of the manufactured home has a leasehold interest pursuant to a lease
with a primary term of at least 20 years for the real property on which the
manufactured home is affixed and where the lease expressly provides for
disposition of the manufactured home upon termination of the lease. The home
has to meet all the other parts of this definition which are: it is a residential
structure; has the moving hitch, wheels, and axles removed; is placed upon a
permanent foundation either on land owned by the owner of the manufactured
home or on lease land as defined above.
( Effective August 7, 2003; HB 1006, s. 4, S. L. 2003- 400)
G. S. 105- 275( 8) c – Clarify Property Tax Exclusion for Property used to
Reduce Cotton Dust: This subdivision was rewritten to include in the current
property tax exclusion, all parts of a ventilation or air conditioning system that are
integrated into a system used for the prevention or reduction of cotton dust,
except for chillers and cooling towers. Previously, if the air conditioning or
ventilation system was used for any additional purpose other than cotton dust
removal, they were not considered to qualify for the exclusion.
( Effective July 1, 2003; HB 397, s. 43A. 1; S. L. 2003- 284)
G. S. 105- 277.11, G. S. 105- 284, G. S. 159- 107, and G. S. 159- 108 - Taxation of
Property Subject to a Development Financing District Agreement: G. S.
105- 277.11 is reenacted and rewritten to read: Property that is in a development
financing district established pursuant to G. S. 160A- 515.1 or G. S. 158- 7.3 and
that is subject to an agreement entered into pursuant to G. S. 159- 108, shall,
pursuant to Article V, Section 14 of the North Carolina Constitution, be assessed
for taxation at the greater of its true value or the minimum value established in
the agreement.
North Carolina Department of Revenue
Tax Administration Page 33 2003 Tax Law Changes
G. S. 105- 284 is amended by adding a new subsection ( d) which reads: Property
that is in a development financing district and that is subject to an agreement
entered into pursuant to G. S. 159- 108 shall be assessed at its true value or at
the minimum value set out in the agreement, whichever is greater.
G. S. 159- 108( c) is rewritten to require the county assessor to assess property
subject to a development financing district agreement at its true value or at the
minimum value set out in the agreement, whichever is greater.
G. S. 159- 107( d) is rewritten to require that the county assessor determine the
incremental valuation of the district each year. The incremental value is the
difference between current value and the base valuation of the district. If there is
no incremental valuation all proceeds of the taxes are retained by the county, city
or special district. If there is an incremental valuation the proceeds are
distributed as provided in 159- 107( d)( 2).
G. S. 159- 108( d) is rewritten to require that the minimum value set out in a
development financing district agreement be adjusted after a county reappraisal
of real property to ensure the taxing unit receives the same amount of tax on the
property.
( Effective August 7, 2003; SB 725, ss. 2,20, and 21, S. L. 2003- 403)
G. S 105- 299 - Employment of Experts: Amendment moves a comma to make
a technical correction, which does not change the meaning.
( Effective August 14, 2003; SB 97, s. 9, S. L. 2003- 416)
G. S. 105- 307, G. S. 105- 330.4 and G. S. 105- 360 - Waive Various Deadlines,
Fees and Penalties for Deployed Military Personnel. Allows deployed military
personnel 90 days after the end of their deployment to pay property taxes at par.
Allows deployed military personnel 90 days after the end of their deployment to
list property.
( Effective July 4, 2003; SB 936, ss. 4( a) and 4( b), S. L. 2003- 300)
G. S. 105- 358( a) - Waiver of Worthless Check Penalty: Amends 105- 358( a) by
removing “ ten percent ( 10%)” and leaving just “ penalty”. Clarifies that the
collector may upon making a record of the reasons therefore reduce or waive the
penalty imposed on giving a worthless check under G. S. 105- 357( b)( 2).
( Effective August 14, 2003; SB 97, s. 10, S. L. 2003- 416)
G. S. 105- 361 – Tax Certification: This act allows an internet- based alternative
to property tax certification procedures.
North Carolina Department of Revenue
Tax Administration Page 34 2003 Tax Law Changes
The governing body of a taxing unit may adopt an ordinance to allow a person to
rely on information obtained from the taxing unit’s web site as if it were a
certificate issued pursuant to G. S. 105- 361( a). The ordinance may provide for
disclaimers concerning the information. Any person who relies on the web site
information must keep a copy and present a copy of the information as
necessary. The tax collector shall be liable on the tax collector’s bond for any
loss to the taxing unit arising from an understatement of the taxes contained in
the information available on the web site unless the taxing unit’s ordinance
provides the disclaimers.
( Effective August 7, 2003; HB 972, s. 1, S. L. 2003- 399)
G. S. 158- 7.3 and G. S. 160A- 466 – Joint Undertaking of Development
Projects: These acts amend G. S. 158- 7.3 and G. S. 160A- 466 to authorize local
governments that are jointly undertaking a development project to enter into
agreements to finance the project. The local governments may agree to place
the proceeds from some or all property taxes levied on the park or site into a
common fund or transfer those proceeds to a nonprofit corporation or other
entity.
( Effective August 14, 2003; HB 1301, ss. 1 and 2, S. L. 2003- 417)
G. S. 159- 11 – Revenue Neutral Tax Rate: Amendment requires the local
government budget officer to publish the revenue- neutral tax rate in years when
there is a general revaluation of real property. The revenue- neutral tax rate is
the rate the is estimated to produce revenue for the next fiscal year equal to the
revenue that would have been produced for the next fiscal year by the current tax
rate if no reappraisal had occurred.
( Effective July 26, 2003; SB 511, s. 1, S. L. 2003- 264)
MOTOR FUELS TAX
G. S. 105- 449.49 – Temporary Permits: This statute was amended to reduce
the maximum time a motor carrier can operate in the State using a temporary
permit from 20 days to 3 days, rather than obtaining a license.
( Effective January 1, 2004; SB 236, s. 10.1, S. L. 2003- 349.)
G. S. 105- 449.60( 33) – Clarifying: This statute was amended to clarify the tank
wagon definition to include vehicles that are not a transport truck although they
are designed to carry at least 1,000 gallons. The current definition appears to
exclude those tank wagon vehicles whose individual compartments are less than
1,000 gallons but are designed to carry in excess of 1,000.
( Effective January 1, 2004; SB 236, s. 10.2, S. L. 2003- 349.)
North Carolina Department of Revenue
Tax Administration Page 35 2003 Tax Law Changes
G. S. 105- 449.65( a) – License Requirement: This statute was amended to
require a taxpayer that imports tax- paid motor fuel from an out- of- state terminal
into North Carolina to be licensed as a distributor. Currently the statutes allow the
distributor’s license to be optional, however, if the product is being imported the
taxpayer must then register as a licensed importer and file a tax return. A
distributor license allows the taxpayer to import and export product.
( Effective January 1, 2004; SB 236, s. 10.3, S. L. 2003- 349.)
G. S. 105- 449.67 – Clarification: This statute was amended to clarify that
distributors operating solely within this State are not required to obtain a license.
( Effective January 1, 2004; SB 236, s. 10.4, S. L. 2003- 349.)
G. S. 105- 449.69( d) & ( e) – Repeal: This statute was amended to remove the
reporting requirement of the license- holder to notify the Department of any states
to which they plan to export or from which they plan to import motor fuel. There
are no means for tracking this information once the application has been
submitted. The taxpayer, by virtue of the supplier license, is able to import and
export motor fuel.
( Effective January 1, 2004; SB 236, s. 10.5, S. L. 2003- 349.)
G. S. 105- 449.72( a)( 2) – Bond Increase: This statute was amended to increase
the variable bond amount of licensees to a maximum of five hundred thousand
dollars ($ 500,000). The current bond amount of two hundred fifty thousand
dollars ($ 250,000) was last adjusted in January 1991.
( Effective January 1, 2004; SB 236, s. 10.6, S. L. 2003- 349.)
G. S. 105- 449.73 – Denial of License: This statute was amended to enable the
Department to deny a motor fuel license to a taxpayer that fails to file a return or
pay a tax due in other North Carolina Revenue Tax Laws.
( Effective January 1, 2004; SB 236, s. 10.7, S. L. 2003- 349.)
G. S. 105- 449.86( a)( 1) – Repeal: This statute was amended to conform the
statutes with the legislative change made last session to exempt local
governments from the motor fuel tax.
( Effective January 1, 2004; SB 236, s. 10.8, S. L. 2003- 349.)
G. S. 105- 449.115( b) – Technical: This statute was amended to remove the
requirement that shipping documents must be machine- printed by the operator of
a bulk plant. This requirement was imposed inadvertently when the statutes were
reorganized. The act does not change the requirement that terminal operators
must machine- print shipping documents.
( Effective January 1, 2004; SB 236, s. 10.9, S. L. 2003- 349.)
North Carolina Department of Revenue
Tax Administration Page 36 2003 Tax Law Changes
G. S. 105- 449.117 – Enforcement: This statute was amended to clarify the
Department's authority to investigate illegal use of non- tax- paid fuel for highway
use using State equipment. Currently the statutes exempt from tax the sales of
motor fuel sold to the State of North Carolina.
( Effective January 1, 2004; SB 236, s. 10.10, S. L. 2003- 349.)
G. S. 105- 449.123( a) – Marking Requirements: This statute was amended to
clarify that storage facilities for dyed kerosene must be clearly marked for non- tax
use only, just like the storage facilities for dyed diesel fuel. It also provides that
the dispensing device for dyed fuel must be clearly marked as non- tax use only.
( Effective January 1, 2004; SB 236, s. 10.11, S. L. 2003- 349.)
G. S. 119- 15 – Definitions: This statute was amended to include definitions in
the inspection tax laws for airport terminals and terminal operators. Jet fuel and
kerosene is being delivered from the pipeline directly to the airports. This
bypasses the motor fuels terminals therefore bypassing product accountability.
The Internal Revenue Service has licensed these terminals and the terminal
operators are reporting the deliveries to the airports.
( Effective January 1, 2004; SB 236, s. 10.12, S. L. 2003- 349.)
G. S. 119- 15.1 – License Requirement: This statute was amended to require
kerosene terminal operators to be licensed and to file reports. Currently, jet fuel
and kerosene are being delivered from the pipeline directly to airports. This
method of delivery bypasses the motor fuels terminals and thereby bypasses the
record- keeping requirements that help ensure that the Department can uniformly
enforce the tax statutes. Kerosene terminal operators are currently subject to tax.
The Internal Revenue Service licenses these terminals and the terminal
operators must report deliveries to the airports. With the exception of adding the
license requirement for the kerosene terminal operators, the rest of the text was
reformatted from G. S. 119.16.2 to align the text in the same manner as Article
36C.
( Effective January 1, 2004; SB 236, s. 10.14, S. L. 2003- 349.)
G. S. 119- 15.2 – License Application: This statute was amended to identify the
information required to obtain a license under the kerosene statutes. This text
was reformatted from G. S. 119.16.2 to align the text in the same manner as
Article 36C.
( Effective January 1, 2004; SB 236, s. 10.14, S. L. 2003- 349.)
G. S. 119- 15.3 – Bond Requirement: This statute was amended to identify the
bond requirements to obtain certain licenses under the kerosene statutes. This
North Carolina Department of Revenue
Tax Administration Page 37 2003 Tax Law Changes
text was reformatted from G. S. 119.16.2 to align the text in the same manner as
Article 36C.
( Effective January 1, 2004; SB 236, s. 10.14, S. L. 2003- 349.)
G. S. 119- 18( a) – Imposition of Tax: This statute was amended to impose the
inspection tax on dyed diesel. Currently the statutes impose the inspection tax
on all highway fuels, jet fuel, and aviation gasoline. Inspection tax is also
imposed on dyed kerosene, which is used for heating or other non- highway
purposes.
This statute also requires a kerosene terminal operator to file a return in
accordance with the provisions under G. S. 105- 449.100.
( Effective January 1, 2004; SB 236, s. 10.15, S. L. 2003- 349.)
G. S. 119- 18( a1) – Deferred Payment: This statute was added to provide a
licensed kerosene distributor the same benefits of deferred payments and
discounts that a licensed motor fuel distributor receives. Finally, this Part
reorganizes and modernizes the language of the kerosene licensing statutes.
( Effective January 1, 2004; SB 236, s. 10.16, S. L. 2003- 349.)
DEBT SETOFF
G. S. 105A- 2( 6) – Definition of Local Agency Expanded: The definition of
“ Local agency” has been expanded to include water and sewer authorities. As a
result, water and sewer authorities may submit debts to the Department for
collection under the Setoff Debt Collection Act.
( Effective January 1, 2004, and applies to income tax refunds determined on or
after that date; SB 529, s. 1, S. L. 03- 333.)